Acquisition at a premium

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    Meshal Alshammari

    Rarely do companies acquired at a premium return the value that justifies the higher price. I guess the question is the premium ever justified?


    Absolutely. That doesn’t mean it is always justified. Some examples where it may be justified is if there is a strong business case to deter competitor bids. Perhaps the IP of the acquired company is critical to the long-term growth of the acquiring company or perhaps by acquiring the company, the acquirer is able to firm up market share and deter competition within a particular geography. While one would think these reasons may impact the ROI positively, sometimes the true ROI is not realized for many years after the acquisition, if at all, and thus the appearance in the near term is that the acquirer overpaid. In the end, as long as the transaction thesis is realized and the purchase does not destroy value in the merged entity, the price – perceived as overpaid or not – could be justified.

    Charles Ladas

    The premium could be justified if thorough due diligence is performed by the acquirer. However, thorough due diligence should not be excessive, and figuring that out is challenging.

    Craig Hasler

    Hi Meshal,

    Thanks for the prompt.

    I tend to agree with both Michael and Charles’ comments above. The premium (or increased value that the bidder is willing to pay above the value of the company) is ultimately justified by a synergy analysis to determine where value can be derived, from both a front-end (sales/revenue synergies) and back-end (operational synergies) perspective. It’s quite rare that companies who pay a high premium will be able to realize the ROI or performance indicated at the time of the deal, but there are cases where very significant value can be extracted if the acquirer is able to leverage new customer channels to increase revenue, remove duplication of back-end (HR, finance, IT) processes, consolidate operations, and/or receive access to a new market. Obviously every deal is different, but in a lot of cases the premium can be justified to the board at the time of the deal. The performance of the transaction is a very different story 🙂


    Dmitry Govorov

    Premium is in the eyes of the buyer – it’s up to his vision – whether realistic or not – what value he can extract from the target. I reckon in many cases realized acquisition value can be seen through a longer term horizon, or via ‘strategic’ rationale. That’s why the price paid should be quite below the value to the buyer, to account for possible downward ‘adjustment’ in aspirational assumptions.

    Yuin Harng Ng

    The synergies and value-add we can achieve due to our post-integration efforts and capabilities would be our future profit, assuming it exceeds integration costs.

    However, if the premium paid to the target company is in excess of its valuation, then naturally that entire premium would be your future profits given to the target company.

    The structure of a deal will determine how easy or difficult the deal would become a success. Give too much of the potential synergies away to the target company and the margin of success will narrow, especially when potential is merely potential, it needs to be excavated in order to become realised gains.

    Hope this helps, cheers.

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