Understanding Acquisition Premium
Acquisition premium refers to the amount that a buyer pays for a target firm above its assessed fair value.
It represents the additional price the acquiring firm is willing to pay for the company, and it is recorded as goodwill on the buyer’s balance sheet as an intangible asset after the acquisition.
Importance of Acquisition Premium
An acquisition premium arises when a target firm is purchased for more than its fair market value.
This may occur due to competition among bidders, reluctance by shareholders to sell, the potential for synergies, or the buyer’s belief in gaining a competitive advantage.
Paying a premium can help secure the deal and address specific circumstances surrounding the acquisition.
How Does an Acquisition Premium Work?
When a company decides to acquire another, it assesses the target firm’s value and determines the amount it is willing to pay above the assessed value.
This is particularly important when there are competing bids from other firms interested in acquiring the same company.
Goodwill represents a firm’s intangible assets, including its brand name, stakeholder relations, patents, and reputation.
Goodwill is affected when the market value of an intangible asset falls below its acquisition cost.
Sometimes, a buyer may acquire a firm for less than its fair market value, resulting in a negative goodwill balance.