An acquisition premium is the amount of additional consideration offered to the shareholders of a company that is being acquired. Typically, this supplement is added to the initial offer price in order to entice shareholders to approve the sale of their shares.

Acquisition premiums are commonly used in mergers and acquisitions (M&A), and are usually paid once the deal is finalized. The acquisition premium can vary widely, ranging from 10 to 25 percent of the initial offer price. Occasionally, even higher premiums can be offered to secure a deal, such as with the merger between Marriott International and Starwood Hotels in 2016.

Ultimately, the size of the acquisition premium will be based on the perceived value of the company by the acquiring party and will factor in such things as the strength of the market, the value of the company’s assets and the company’s competitive position in the industry. It’s quite common for the targeted company to seek a higher premium, but there are also cases where an acquiring party will reduce a premium due to the potential impact of an extended approval process.

The goal of an acquisition premium is to make the deal attractive to a large enough percentage of stockholders who will agree to the sale of their shares. Often, an acquisition premium of 20 percent or greater is especially attractive to shareholders, who will be induced to cash out of the company and receive a higher return on their investment.

The paying of an acquisition premium can be contentious and can create tension between the shareholders and the leaders of the company. Many shareholders, primarily those with large stakes in the company, may not fully understand or accept the motives of the acquiring party, and may view the premium as another way for company executives to take advantage of those less informed. This can lead to conflict between the shareholders and the executives. It’s important for leaders of the company to make a strong case for why the acquisition premium is beneficial for the company, and for the acquiring party to be transparent about their intentions.

In conclusion, an acquisition premium is an important part of any merger or acquisition deal, and understanding the nuances of it can help both the target and acquiring company achieve the best result possible. By being aware of the size and implications of the acquisition premium, both parties can ensure that the best outcome is achieved while providing a larger return on the shareholders’ initial investment.