Offer Price
February 24, 2021
What is the Offer Price?
In an M&A deal, the offer price is the price paid by an acquirer for the stock of a target company. The offer price is higher than the unaffected share price as it includes an acquisition or control premium. The control premium is the additional price potential buyers are willing to pay to acquire a controlling stake in the equity of a business. Achieving control over the key strategic decisions of the company improves the ability of the acquirer to create value.
The offer price may be revised multiple times between the initial offer and the deal closing date. This happens as the buyer may not be able to acquire the desired number of shares to achieve control at the original price. There are several reasons for this, including the unwillingness of some of the target’s existing shareholders to part with their shares at the price offered by the buyer. They may hold out in anticipation of a further upside in the company’s share price. In such scenarios, buyers may revise the offer price to sweeten the deal for the unwilling target shareholders.
Key Learning Points
- The offer price is the price an acquirer pays for a target company’s stock in an M&A deal
- The offer price includes acquisition or a control premium. Buyers pay this premium to achieve control over key business decisions (restructuring, company strategy, etc.) and create additional value through synergies.
- The offer price is calculated by comparing the premium paid for a peer group of similar M&A deals, this is known as transaction comparables analysis
- The offer price is used to calculate the control premium, which could help in determining whether value was created or destroyed in a deal
How is the Offer Price Calculated?
The transaction comparables analysis is used to calculate the offer price. By comparing the offer price for similar deals, the offer price can be compared against the unaffected share price to calculate the control premium.
Typically, the control premium is between 20 to 40%. Companies can look at historical data on premiums paid for similar deals. They can also use the historical enterprise value (EV) multiples of target companies to determine the premium paid. The two methods can be used to check each other’s findings. It is important to analyze the most recent transactions as those premiums will be more relevant.
Offer Premium vs Synergies
The buyer pays a premium above the target’s unaffected share price to achieve control. This control is valuable because it gives an acquirer ability to set the strategy of the target, make operational improvements, extract cost savings, and ultimately, create value.
Synergies represent the additional value created through the acquisition. Synergies are where two entities, when combined, create greater value than on a standalone basis. The combined business will take time to realize synergies, often over several years. Analysts discount these future streams of cash flows to calculate the present value (PV) of synergies.
The difference between the PV of synergies and the offer premium paid represents the acquisition’s value created or destroyed.
It is ideal for an acquirer that the present value of synergies is greater than the premium paid. If the present value of synergies is lesser than the premium paid, it means they may have overpaid for the deal.
Example
Based on the information below, we have been asked to calculate the offer premium and the value created through the following deal.
The buyer has acquired 200 million shares of the seller for an offer price of 24.8 per share. The present value of synergies created through this deal is 1,800.
First, we calculate the offer premium or the difference between the offer price and the unaffected share price.
The buyer has paid a premium of 4.6 or 22.8% above the unaffected share price. Using this information, we can calculate whether the deal has created or destroyed value for the buyer.
Out of the total PV of synergies, the buyer has paid 920 (offer premium 4.6*200 m number of shares) to selling shareholders. The remaining value for the buyer is 880, indicating value creation.
If the offer price had been, for example, 35,0, the deal would have destroyed value for the buyer.