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Practitioner's Complete Guide to M&As: An All-Inclusive Reference, with Website by David T. Emott

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Topic 48

Discounts and Premiums

Topic 48 explores the nature and application of discounts and premiums in the determination of values encountered in the M&A process. The basis used to determine discounts or premiums must be clearly understood to ensure proper application in the determination of values. Also, the base value to which the discount or premium is applied must be consistent with the basis used to determine the discounts or premiums.

ACQUISITION PREMIUMS

  • Acquisition premium is the additional value (paid) over the total value of the fully distributed minority value of an enterprise that emanates from the ability and right of the controlling acquirer to exercise control over the management and affairs of the enterprise. This control provides the beneficiary with the ability to ultimately maximize value and have full access to the free cash flow (FCF) of the business. This value generally includes the value to the buyer of expected synergies and platform value potentials.1
  • Acquisition premiums, including control and probably synergy effects, paid in acquisition transactions of public companies have been about 30% to 45% higher than the fully distributed minority values prior to the transactions.2
    • It is not clear whether such acquisition values fall at the lower, middle, or upper end of the range of the buyer's target control or investment value level, as the levels are known only to the buyer in the deal.
    • No doubt the buyer feels that something below the upper-level ...

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