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Offer premium calculator

Offer premium is the offer price minus the unaffected price, over the unaffected price. A $52 bid on a $40 close is a 30 percent premium, or $12 a share.

Offer premium

30.00%

$52.00 offer against $40.00 unaffected, a premium of $12.00 a share.

Unaffected price
$40.00
Offer price
$52.00
Spread per share
$12.00
$

The share price before the offer leaked. The unaffected close, not the last trade.

$

The formula

Premium=Poffer−PunaffectedPunaffected\text{Premium} = \frac{P_{\text{offer}} - P_{\text{unaffected}}}{P_{\text{unaffected}}}

The unaffected price is the close before the offer leaked, not the last trade. A negative figure is a discount to that close. The page prints percentage points: 30, not 0.30.

The close before the news

The denominator is the price that did not already contain the deal. Once a rumour is in the tape, the last trade is a blend of the old price and the offer, so the premium against that trade looks smaller than it is.

A $52 offer on a $40 unaffected close is (52−40)/40=0.30(52 - 40) / 40 = 0.30, a 30 percent premium. The spread is $12 a share. That $12 is what the buyer is paying above the standalone price for control, for synergies the buyer thinks it can take, or for both.

Equity value implied by the offer is the offer times the share count. This page prices one share. The enterprise value calculator is the next object if the bid is for the operations, not only the equity.

A bid below the close

The same $40 close, offer $36. Premium is (36−40)/40=−0.10(36 - 40) / 40 = -0.10, a 10 percent discount. The spread is $-4 a share.

A discount bid happens. A firm in trouble, a close that already jumped on a rumour, or a buyer who thinks the unaffected price was the high. The formula does not care. It will print a negative premium rather than swapping the labels.

A smaller close, a 20 percent bid

Unaffected price $25, offer $30. Premium is 20 percent. Spread is $5 a share.

Twenty percent on $25 is a smaller dollar spread than 30 percent on $40, which was $12. Premia are percents. Synergies and control are dollars. A 20 percent premium on a cheap close can be a smaller cheque than a 15 percent premium on a dear one. The DCF calculator is the standalone value the premium is being added to, if you are building the bid rather than reading one.

What this page is not doing

It is not a merger model. It does not mix cash, stock, or collar terms, and it does not compute a contribution analysis. One offer price, one unaffected price, one ratio.

It is also not a recommendation about what premium a deal should pay. Thirty percent on the teaching sheet is $52 against $40. Unaffected close is a research choice: last close, 30-day average, or the close the week before the leak. Type the one your sheet is using. This is educational material, not financial advice.

Worked examples

\$52 on a \$40 close

The unaffected share price is $40. The offer is $52. What is the premium?

  1. Spread: 52−40=1252 - 40 = 12, so $12 a share.
  2. Premium: 12/40=0.3012 / 40 = 0.30, which is 30 percent.
  3. The other walk: 52/40−1=0.3052 / 40 - 1 = 0.30.

The premium is 30 percent. The spread is $12 a share.

A \$36 bid on the same close

Keep the unaffected price at $40. The offer is $36. What is the premium?

  1. Spread: 36−40=−436 - 40 = -4, so $-4 a share.
  2. Premium: −4/40=−0.10-4 / 40 = -0.10, which is a 10 percent discount.

The figure is a 10 percent discount. The spread is $-4 a share.

\$30 on a \$25 close

Unaffected price $25, offer $30. What is the premium?

  1. Spread: 30−25=530 - 25 = 5, so $5 a share.
  2. Premium: 5/25=0.205 / 25 = 0.20, which is 20 percent.

The premium is 20 percent. The spread is $5 a share.

The mistake that costs the most

Measuring the premium against the last trade after the rumour is in, or mixing a percent premium with a dollar synergy claim without converting.

Once the tape has the news, the last trade has already moved toward the offer. A $52 bid against that last trade looks like a residual. Against the $40 unaffected close it is 30 percent. The residual is not the deal.

The other error is adding a 30 percent premium to a DCF that already assumed the buyer would pay one.

Common questions

Which close is the unaffected price?

The close that does not already contain the deal: often the last close before the leak, sometimes a 30-day average. Type the one your sheet is using. This page divides two prices. It does not choose them.

Cash offer or stock offer?

A cash offer has one price. A stock offer has an exchange ratio, so the offer value moves with the buyer's share price. Type the implied offer price per target share if the consideration is mixed.

Is 30 percent a typical premium?

It is $52 against $40 on the teaching sheet. Observed premia vary by sector, by size, and by whether a process was run. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.