Thursday, July 10, 2014

Setting/negotiating the Bid Premia in Acquisitions

It is easy to set the likely minimum and maximum prices that should be paid for a target firm.  It is more difficult to adhere to these values in practice.  Without such boundaries, however, we don't have a chance for a disciplined bid.  As we've said many times, there is not better time to create or destroy value than when paying for the deal.  Value is created (destroyed) as we underpay (overpay) for a particular company.

From the bidder's point of view, the maximum that should ever be paid for a target is the NPV of the acquisition to the bidder.  That is, calculate the incremental value expected to be obtained from a deal.  This is the maximum dollar bid premium.  But if you pay this amount, you will break even and no value will be created for your shareholders.

From the target's point of view the minimum that would likely be accepted in a deal is the current market price.  Although one can create scenarios in which a target would take less because of liquidity issues, such scenarios are rare.  In practice, the mimimun for which a firm can be acquired is its current market price and as more shares of the target are sought, higher premia must be paid.

The actual price paid generally falls between these two boundaries and is a function of the bargaining power of each party.

Factors increasing the bargaining power of the bidder include the existence of unique synergies available only to this bidder, a toehold in the bidder, and the ability to pay cash to facilitate a speedy transaction.

Factors favoring the target include multiple bidders (usually a function of synergies available to many), a high level of target managerial ownership and the necessity of target management for continued success of the venture.

The actual price paid will be a function of the various estimations implied by these concepts and the negotiating ability of each party.  It takes a disciplined bidder to not overpay.  It takes a disciplined target to know which deals to reject.  Understanding one's boundary points is the start to this discipline.

All the best,


No comments:

Post a Comment