Acquisition premium, also known as takeover premium or control premium, is the amount by which the price offered for acquiring a company exceeds the company’s market value. It represents the additional cost that an acquiring company is willing to pay to gain control of another firm. This premium is often expressed as a percentage of the target company’s market price per share.

Key points about acquisition premium:

1. **Purpose:**
– The acquisition premium is a strategic component in mergers and acquisitions (M&A). It reflects the perceived value of gaining control over the target company, including potential synergies, strategic advantages, and other benefits.

2. **Calculation:**
– The acquisition premium is calculated as the difference between the acquisition price and the target company’s market value before the acquisition announcement. The formula is as follows:
\[ \text{Acquisition Premium} = \left( \frac{\text{Acquisition Price} – \text{Pre-Acquisition Market Value}}{\text{Pre-Acquisition Market Value}} \right) \times 100 \]

3. **Factors Influencing Premium:**
– The level of acquisition premium can be influenced by various factors, including the strategic importance of the acquisition, competitive bidding, potential synergies, market conditions, and the target company’s performance.

4. **Premium in Tender Offers:**
– In a tender offer, the acquiring company makes a direct offer to the shareholders of the target company to purchase their shares at a specified price. The premium in a tender offer is the difference between the offer price and the current market price of the target company’s shares.

5. **Premium in Negotiated M&A Deals:**
– In negotiated M&A deals, where the acquiring company and the target engage in discussions before reaching an agreement, the premium is often a subject of negotiation. The acquiring company may offer a higher premium to gain the approval of the target company’s board and shareholders.

6. **Hostile Takeovers:**
– In hostile takeovers, where the target company is not willing to be acquired, the acquiring company may need to offer a substantial premium to persuade shareholders to tender their shares.

7. **Shareholder Approval:**
– Shareholders of the target company often assess the acquisition premium when deciding whether to accept an offer. A higher premium may increase the likelihood of shareholder approval.

8. **Market Reaction:**
– The announcement of an acquisition can impact the stock prices of both the acquiring and target companies. The market’s reaction reflects investor perceptions of the deal, including the attractiveness of the acquisition premium.

Acquisition premiums are an important consideration in the evaluation of M&A transactions. While a premium can indicate the perceived value of a transaction, it is essential for both acquiring and target companies to conduct thorough due diligence to ensure that the deal aligns with their strategic objectives and creates value for stakeholders.