Premiums paid analysis

A premiums paid analysis sits alongside precedent multiples and answers a related but distinct question. Precedents ask what buyers paid relative to earnings; a premiums analysis asks what they paid relative to where the target's own shares were trading before anyone knew. For a board deciding whether an offer is adequate, the second framing is often the more useful one, because it compares this offer with what other sellers in comparable situations achieved.

The whole exercise turns on the reference price, which is why the undisturbed price is specified rather than the price on the day before announcement. Leaks, press speculation and stake building routinely move a share price well before an offer is public, and measuring against the inflated price makes a generous offer look mean.

Read the distribution rather than the average. Premiums are wider in a competitive auction than in a bilateral negotiation, wider where a strategic buyer has real cost synergies than where a financial buyer is working to a return hurdle, and structurally different where the target already has a controlling shareholder, because the outcome is negotiated rather than won.

Its limitation is that a premium is a fact about a starting price. A depressed target can be bought at a large premium and still be sold cheaply, and a fully valued target can be bought at a modest premium and still be sold well. It is a cross check on the multiple analysis, not a replacement for it.