Acquisition Premium

What is an 'Acquisition Premium'

An Acquisition premium is the difference between the estimated real value of a company and the actual price paid to obtain it. Acquisition premium represents the increased cost of buying a target company during a merger and acquisition. There is no requirement that a company pay a premium for acquiring another company; depending on the situation, they may even get a discount.

BREAKING DOWN 'Acquisition Premium'

Once a company decides it wants to acquire another, it will first attempt to put a real value on the company to be purchased. Then, once it decides how much the company is worth, the acquiring company will decide how much it's willing to pay on top of that in order to present an attractive deal, especially if there are other firms considering acquisition. If this premium offer is accepted, but the value of the company drops before the acquisition is final, possibly because its stock price falls and its product becomes obsolete or concerns are raised about the future of the industry, then the acquiring company may withdraw its offer.

RELATED TERMS
  1. Horizontal Acquisition

    The acquisition of one company by another in the same industry. ...
  2. Dilutive Acquisition

    A takeover transaction that will decrease the acquirer's earnings ...
  3. Swap Ratio

    The ratio in which an acquiring company will offer its own shares ...
  4. Tuck-In Acquisition

    The acquisition of a company made for the sole purpose of merging ...
  5. Predator

    In mergers and acquisitions, a company with sufficient financial ...
  6. Acquisition Cost

    1. The cost that a company recognizes on its books for property ...
Related Articles
  1. Personal Finance

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller. We tell you what to look for.
  2. Fundamental Analysis

    Key Players In Mergers And Acquisitions

    Strategic acquisition is becoming a part of doing business. Discover the different types of investor groups involved.
  3. Investing Basics

    How Mergers and Acquisitions Can Affect A Company

    M&A can have a profound effect on a company’s growth prospects and outlook, but with a significant degree of risk.
  4. Forex Fundamentals

    How Foreign Exchange Affects Mergers and Acquisitions Deals

    Learn how foreign exchange rates can impact the flows of international merger and acquisition (M&A) transactions, and understand how deals can impact exchange rates.
  5. Investing Basics

    Analyzing An Acquisition Announcement

    These deals can make or break investors' returns. Find out how to tell the difference.
  6. Options & Futures

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  7. Entrepreneurship

    Why Successful Business Owners Sell Out

    Learn the motives that drive companies into the arms of an acquirer.
  8. Investing Basics

    Explaining Premiums

    Premium has a few different meanings in the financial world.
  9. Investing Basics

    The Merger - What To Do When Companies Converge

    Learn how to invest in companies before, during and after they join together.
  10. Investing

    Mergers Put Money In Shareholders' Pockets

    Learn the five ways mergers and acquisitions can increase a company's value.
RELATED FAQS
  1. Are acquisitions only for large companies?

    Learn how mergers and acquisitions, despite what the media portrays, actually take place more often among small companies ... Read Answer >>
  2. How do I evaluate whether a company is a good acquisition candidate?

    Evaluate whether a company is a good acquisition candidate by analyzing its price, debt load, litigation and financial statements. Read Answer >>
  3. What is the difference between a merger and an acquisition?

    Read about the legal and practical differences between a corporate merger and corporate acquisition, two terms often used ... Read Answer >>
  4. In which industries are mergers and acquisitions most common?

    Learn the reasons why the health care, technology, financial services and retail sectors typically involve a high level of ... Read Answer >>
  5. What is the difference between a merger and a takeover?

    In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously ... Read Answer >>
  6. What can cause a merger or acquisition deal to fail?

    Mergers and acquisitions are resorted to when one or both companies involved have goals as diverse as seeking greater market ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center