value
Acquisition Value Vs Premium
The rule
A takeover creates value only when the real savings and gains are worth more than the extra price paid over the target's own worth.
Where it flips
Looking only at the premium can make you wave off a deal where small-looking savings quietly grow for years. The fix is to weigh the premium against the full future value of lasting savings, not just the first year's savings.
When one company buys another, it usually pays above the market price. That extra is the premium, and it is money handed to the seller's shareholders on day one. The buyer only gains if the joined firm can squeeze out savings or new growth worth more than that premium. So the question is never 'how big is the deal'. It is 'do the savings beat the premium'. Most of the time, hopeful buyers overpay, and the loss lands on their own shareholders.
A worked example
Vikram sees a company pay a ₹4,000 crore premium, claiming ₹1,500 crore of savings. The maths says its own shareholders just lost ₹2,500 crore of value on announcement day. [illustrative]
How to spot it
- ·premium size compared against the savings claimed
- ·vague 'strategic' benefits with no rupee figure
- ·the buyer's stock falling on the announcement
Michael Mauboussin & Alfred Rappaport · Expectations Investing