Maximum consideration / Maximum premium- AFM BY TAHA POPATIA

 Market value of acquirer pre-acquisition : $500 million

 Market value of target pre-acquisition : $300 million
 Market value of entire company after acquisition : $900 million

Therefore,

 Synergy created due to acquisition : Market value of new company – pre acquisition values of
target and acquirer = $900 – ($500 + $300) = $100 million.
 Synergy represents the maximum benefit from the acquisition.

Maximum consideration

 The maximum consideration that the acquiring company will be willing to pay to target company
shareholders can be calculated with keeping in mind that the maximum the acquirer will be
willing to pay will be the amount that does not make acquirer worse off than the position it had
before acquisition.

Post- Consideration to Remaining value that Increase in wealth of Acceptability to

acquisition target company will belong to Acquirer’s shareholders Acquirer’s
value(A) shareholders (B) Acquirer’s shareholders (C – Pre- acquisition value) shareholders
(C = A-B)
$900 million $350 million $550 million $50 million Yes
$900 million $375 million $525 million $25 million Yes
$900 million $400 million $500 million $0 million No gain
$900 million $425 million $475 million ($25 million) No
$900 million $450 million $450 million ($50 million) No

 Above table demonstrates that the maximum to be paid should be $400 million. Any excess
above this amount will lead to a loss in wealth and hence this is the maximum that the acquiring
company shareholders will be willing to pay.
 If acquirer pays maximum consideration, all synergy relevant benefits are transferred to the
target company shareholders.

Maximum premium

 Maximum premium = All synergy benefits = Market value of company after acquisition
transaction – (Pre-acquisition value of both companies before acquisition transaction).
 Maximum premium = Maximum consideration – Market value of target pre-acquisition.

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