Acquisition Premium Definition
Acquisition Premium refers to the excess amount that an acquiring company pays over the market value of the target company during a takeover or merger. This additional amount is seen as valuable since it provides the acquiring company a larger stake, increased voting rights, or more significant control over the target company.
Acquisition Premium Key Points
- It’s the excess amount paid over the market value during a takeover or merger.
- Acquisition premium provides the acquiring company with more control over the target company.
- The premium signifies the additional value the acquiring company sees in the target, over its current market valuation.
- The concept applies to all industries and sectors, including cryptocurrency and blockchain companies.
What is an Acquisition Premium
An acquisition premium is an economic concept applied during mergers and acquisitions. The acquiring company offers a premium over the current market value of shares to entice shareholders of the target company, thus gaining control over the target. This premium is an indicator of the additional value that the purchaser sees in the company being acquired, over and beyond its publicly traded market value.
Why an Acquisition Premium is Paid
An acquiring company might pay a premium for various strategic reasons. Such reasons include gaining access to a broader customer base, expanding into new markets, acquiring unique technology or expertise, or eliminating competition. Especially in the crypto and blockchain industry, where technology, patents, and intellectual property hold immense value, an acquisition might be carried out to procure these assets.
Who Calculates the Acquisition Premium
The acquisition premium is typically calculated by the teams performing the due diligence for the merger or acquisition. This involves financial analysts, accountants, and corporate finance professionals from the acquiring company, sometimes supported by external consulting, legal, and financial advisory firms.
Where the Acquisition Premium is Applied
The acquisition premium is applied primarily during corporate takeovers or mergers, across industries. This includes the crypto and blockchain sectors, where acquisition premiums are frequently observed during takeovers of smaller start-ups by larger, more established companies.
When an Acquisition Premium is Used
Acquisition Premium is used during the negotiation phase of a merger or an acquisition. It forms part of the purchase consideration that the acquiring company offers to the target company’s shareholders, to entice them into selling their stakes.
How Acquisition Premium Affects the Market
Payment of an acquisition premium could affect the market in several ways. It could push up the stock price of the target company, reflecting the additional value seen by the acquirer. On the other hand, the acquirer’s stock might decline, given the additional financial burden imposed by the premium. The reaction of the market is therefore dependent on whether the acquisition is seen as beneficial or detrimental to the prospective growth and profitability of the respective companies.
