An acquisition premium is the difference (excess) between the market value of a company and the price paid to acquire it. An acquisition premium represents the increased cost of buying a target company during a merger and acquisition (M&A) transaction.

The Valuations team at Findex conducted a study of acquisition premiums in Australian transactions between 1 January 2013 and 31 December 2023. This study was conducted for analysis purposes only. The underlying data for the acquisition premium was sourced from S&P Capital IQ and yielded approximately 535 transactions (with meaningful data) that were completed during the period.

No specific definition exists for acquisition premium, which could reflect the value of both control and synergies. Our study is based on all transactions irrespective of the percentage acquired. Acquisition premiums observed for transactions where percentage acquired is equal to or more than 50% may arguably have higher proportion of control premiums, however, it must be noted that it is difficult to separately quantify control premiums from observable data of acquisition premiums.

Magnitude of the acquisition premium paid in a specific transaction may be impacted by several factors which may include the following:

• Overall deal environment in the economy and specific industry;

• Nature of industry/sector in which the target operates;

• Type of consideration;

• Competitive situation in the bidding process;

• Percentage already owned by the buyers;

• Percentage sought to be acquired in a transaction;

• Size of the transaction; and

• Buyers size and purchasing power relative to the transaction and target’s size.

Not all the above factors are analysed and presented in this study due to limitations in the availability of data and/or results of observed data not being meaningful.

We note that S&P Capital IQ reports acquisition premiums based on:

• Offer Per Share Price;

• Share Price one month before announcement;

• Share Price one week before announcement; and

• Share Price one day before announcement.

However, our analysis is based on acquisition premiums reported based on share price one month before announcement due to availability of valid data points, and also that it is believed to be relatively less affected by bid speculation. We also note that our analysis is based on all positive acquisition premiums.

Key findings

Acquisition premiums by sector

We observed significant variability in the acquisition premium for transactions across different sectors.The materials sector dominated the number of transactions, whereas the healthcare sector recorded the highest median acquisition premium since 2013. 

The lowest median acquisition premiums were observed for the real estate sector

Trends in acquisition premiums from 2012 to 2022 

The highest acquisition premiums were observed for transactions closed during 2022. 2023 also witnessed 14 out of a total 39 transactions (where a premium was reported) closed in materials sector along with fluctuating gold price.   

The lowest median acquisition premiums were observed during 2014 (27.4%), impacted by low premiums observed for transactions in the materials, real estate and services (other) sectors. The highest average acquisition premium was observed in 2022 (70.3%), among which ~61% comprises materials, energy or information technology sector transactions.

Consideration type: Cash versus Equity 

Cash remained the preferred consideration type followed by equity. During the majority of the 10 years analysed, median acquisition premiums were near indistinguishable for transactions with cash as the consideration type, as compared with transactions where equity/scrip was the adopted consideration type.

Transaction size and acquisition premiums 

We note that generally lower acquisition premiums were observed for larger transactions (measured by the implied enterprise value). This may suggest that prices of larger firms are relatively more efficient. Furthermore, there exists a possibility that acquirers perceive that relatively less opportunities exist for merger and acquisition synergies due to larger firms being more mature. Integration challenges are also more likely to exist for acquisitions of larger companies which can impact prices paid. 

Findex Valuation Services 

At Findex, we are experts in assessing the true potential of a transaction or liquidity event. Whether you’re planning an acquisition, divestment, restructure, option plan, refinance or developing a new business strategy, we can help ensure your valuation is prepared on a fundamentally sound basis. Using relevant research, analysis and professional care, our Valuations team take a tailored approach to provide you with independent valuation considerations and the information required to assess the true potential of a transaction (or liquidity event) and instil confidence in your decision making.   

Contact us today to talk with a valuations expert and assess the true potential of a transaction and instil confidence in your decision making.  

The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Findex (Aust) Pty Ltd ABN 84 006 466 351 (Findex).