Skip to content

How an offer premium is measured

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. A $36 bid on the same close is a 10 percent discount. The close that already contains the news is the wrong denominator.

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.

$
On this page

Next on Models and deals

Discounted cash flow

In short

  • Premium is (Poffer−Punaffected)/Punaffected(P_{offer} - P_{unaffected}) / P_{unaffected}. A $52 bid on a $40 close is $12 a share, which is 30 percent.
  • The other walk is 52/40−152 / 40 - 1, which is the same 30 percent. The page prints percentage points: 30, not 0.30.
  • A $36 bid on the same $40 close is a 10 percent discount. The formula does not care about the sign. A negative figure is a bid below the unaffected close.
  • A $30 bid on a $25 close is $5 a share, which is 20 percent. A smaller close with a smaller spread can still be a smaller premium than $12 on $40.
  • The unaffected price is the close before the offer leaked, not the last trade. Type the one your sheet is using. Offer premium is this one division.

The close before the news

Offer premium is one division:

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

The unaffected price is the close that does not already contain the deal. On a $40 close and a $52 offer, the spread is $12 a share and the premium is 30 percent. 52/40−152 / 40 - 1 is the same 30 percent.

The offer premium calculator on this page is that division. It prints percentage points, 30 not 0.30.

Market capitalisation times the premium is the extra equity value the bid is putting on the table. This page does not multiply by the share count. How DCF works is one way a bidder might have arrived at $52. The premium is not that model. It is the gap to the unaffected close.

A bid below the close is a discount

Keep the unaffected price at $40. The offer is $36. The spread is negative. The premium is -10 percent, a 10 percent discount to the close.

Hostile bids, recapitalisations, and offers made after a close has already jumped can all print this sign. The formula will print it. It will not tell you whether the close was the right unaffected price.

A smaller close, a 20 percent bid

Unaffected price $25, offer $30. The spread is $5 a share. The premium is 20 percent.

$5 is less than $12, and 20 percent is less than 30 percent. The first sheet's $52 on $40 is the larger premium. Comparing two deals on the dollar spread alone is how a $5 gap on a $25 close looks small next to a $12 gap on a $40 close, when the percentages are the figures being compared in the first place.

What this page is not doing

It is not a 30-day average against a last close, not a cash-against-stock mix, and not a typical-premium table. A stock offer has an exchange ratio, so the offer value moves with the buyer's share. Type the implied offer price per target share. The three sheets are $52 on $40 (30 percent), $36 on $40 (a 10 percent discount), and $30 on $25 (20 percent). 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.

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. On the first sheet, $40 is that close and $52 is the bid. 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. The 30 percent on this sheet is $52 against $40, one pair of prices.

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.