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What Is an Acquisition Premium?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 15 September 2016
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An acquisition premium is an amount paid over the book value of an asset, also known as goodwill, that may be negotiated as part of the terms of sale. This commonly comes up in the context of mergers and acquisitions. It can have tax implications for shareholders, who may want to consult tax documentation or an accountant to discuss how to handle an acquisition premium in tax declarations and other financial statements.

When a company decides it wants to acquire another firm, members of the organization sit down to discuss the reasons for the decision and the price they are willing to pay for the target firm. They base this price on the given market value and typically estimate an acquisition premium into this estimate. The size of this premium depends on how valuable the target company is to the acquiring company. It can be quite large in some cases.

As the two companies move through negotiations, the acquisition premium can shift. The actual book value of the target can rise or fall during the negotiations, and parties may adjust their stances in response to this. At the final sale, the companies can determine how much of the money goes directly to the merger, to buy out shares, and how much is in excess of the book value. This acquisition premium may need to be recorded differently than the rest of the sale price, depending on the tax code.

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Shareholders receive some of the acquisition premium, in the form of an excessive share price. If the book value of shares is deemed to be $15 United States Dollars (USD) each, for example, the acquiring company might offer an acquisition premium of $3 USD and pay $18 USD for each share at the time of the sale. The shareholders need to record this information carefully in their financial records, as tax authorities may want details on such sales.

If a company resists a merger or takeover, the acquisition premium can increase to sweeten the deal. At the time of the sale, financial publications will usually report the total price and determine how much goodwill was involved. This information can become a topic of speculation and discussion as finance experts debate whether it was a good move on the part of the acquiring company. Paying a premium that's too high could result in losses or other issues, and could be a sign that an acquisition is overvalued or a company's expectations for an acquisition's performance are unreasonably high.

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