Acquisition premium
An acquisition premium compares the bid consideration with a clearly defined target value, often its unaffected market value before the bid became known. It can transfer part of the expected combined benefits to target shareholders. State whether the comparison is per share or total equity, and keep debt and enterprise-value measures consistent. A high premium is not automatically excessive if justified by reliably estimated net synergy, but uncertainty and integration risks can turn an apparent gain into a loss.
Worked example
A target's unaffected equity value is $100 million and the bid is $125 million. The premium is $25 million or 25%. If net synergy is estimated at only $18 million and no other effects apply, the buyer's shareholders face a $7 million value loss.
Common mistake
Comparing an equity bid with an enterprise value including debt, or assuming the premium is an extra cost over and above the bid price.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |