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Briefly explain the economic reason why acquirers have to offer a premium to the target’s shareholders....

Briefly explain the economic reason why acquirers have to offer a premium to the target’s shareholders. Then briefly explain one of the ways that the size of that premium can be measured and the economic logic behind the calculation you choose

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Expert Solution

The acquisition premium is the price charged in the merger or sale for a target business and the market value measured of the product. This reflects the excess fair value of all known properties paid by a purchaser. The sale fee is also regarded as goodwill and remains an intangible asset post-transaction on the purchaser's balance sheet.

Influential Factors

Stock price fluctuations of the target business
Competition in the sector
Other bidders are present
The motives for the procurement company and the goal

Reasons include

Developing stronger market power

Developing synergy

Maintaining growth

Diversification

Tax considerations.

Maintaining goodwill for the existing shareholders

Acquisition premium size can be calculated based on the synergy generation between the firms-

Takeover premium= PT – VT

Where,

  • PT = price paid for the target company
  • VT = pre-merger value of the target company

The gain of the Acquirer = Synergies generated- Premium = S- (PT- VT)

  • Where S = Synergies generated by the merger.

So the post-merger value of the merged company (VC) is

VC= VC* + VT +S-C

Where,

  • C = cash paid to the shareholders.
  • VC*= pre-merger value of the acquirer.

jeff jeffy answered 1 year ago
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