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  1. 062Target shareholders are offered 0.5 acquirer shares for each target share. The acquirer trades at Rs 200 and the target at an undisturbed Rs 80. What premium is being offered?Deal mathsWarm upElite boutique IBPrivate equity

    Try it first

    What premium are target holders being offered?

    Show the worked solution

    A 25% premium. Each target share is exchanged for 0.5 acquirer shares worth Rs 200 each, so the offer is worth Rs 100 a share. The target trades at Rs 80 undisturbed, so holders get Rs 20 more, and 20 over 80 is 25%. The exchange ratio is not itself the premium: a straight swap at market prices would be 80 over 200, or 0.4.

    How do you turn an exchange ratio into rupees?

    Picture a swap where someone offers you half a gold coin for your silver one. To judge the offer you price both coins first. Multiply the exchange ratio by the acquirer's share price to get what each target share is being offered: 0.5 x Rs 200 = Rs 100. Then compare that with the undisturbed priceThe target share price before news or rumours of the deal moved it., Rs 80. The premium is the gap over the undisturbed price, Rs 20 on Rs 80, which is 25%.

    Price the offer in rupees first, then measure it against the undisturbed priceGives up: 1 target shareRs 80undisturbed priceGets: 0.5 acquirer shares x Rs 200Rs 100+Rs 20offer valuePremium20 / 80 = 25%At-market ratio80 / 200 = 0.40.5 is 25% more
    A target holder gives up a share worth Rs 80 and receives half an acquirer share worth Rs 100, so the offer carries Rs 20 of premium, 25% of the undisturbed price, the same as offering 0.5 shares where 0.4 would be a straight swap.

    How do you check it a second way?

    Work out the ratio that would be a straight swap at today's prices: Rs 80 over Rs 200, or 0.4 acquirer shares per target share. An offer of 0.5 is 25% more shares than 0.4, the same premium seen through share counts instead of rupees. Two routes agreeing is what an interviewer wants to hear before you commit to a number.

    The relationship
    Premium=0.5×200−8080=100−8080=25%\text{Premium} = \frac{0.5 \times 200 - 80}{80} = \frac{100 - 80}{80} = 25\%
    0.5the exchange ratio, acquirer shares per target share
    200the acquirer's share price
    80the target's undisturbed share price
    What it says in wordsThe premium is the offer value per share over the undisturbed price, minus one.

    What can happen to the premium before the deal closes?

    In a fixed exchange ratio deal, the target holders' payout moves with the acquirer's share price. If the acquirer falls 10% to Rs 180, the offer is worth Rs 90 and the premium shrinks to 12.5%; if the acquirer rises, the premium grows. That is why target boards push for collars or cash, and why the premium quoted on announcement day is only a snapshot.

    Where candidates lose it

    The fast wrong answer is 20%, from measuring the Rs 20 gap against the Rs 100 offer rather than the Rs 80 undisturbed price. A premium is always quoted on what the target was worth before the offer.

    The other miss is reading 0.5 as a 50% premium. The ratio only means something once both share prices turn it into rupees.

    What the interviewer asks next

    • The acquirer's stock falls 10% before closing. What premium do target holders now receive?
    • If the target has 50 crore shares and the acquirer 100 crore, what share of the combined company do target holders own?
    • Why might a target board prefer a fixed value offer to a fixed exchange ratio?