What happens if the acquirer pays a premium during an acquisition?

When an acquirer pays a premium during an acquisition, it often means that they are offering more than the current market value of the target company to persuade its shareholders to sell. This additional amount, or premium, reflects the acquirer's belief that the target company has significant future potential that justifies the higher price.

When the premium is paid, it can result in some or all of the benefits accruing to the target shareholders because they get to realize a gain on their investment that they may not have otherwise achieved if they retained their shares. This is particularly true if the acquisition leads to increased stock prices for the target company after the announcement or if other strategic benefits emerge from the deal.

The situation also means that while the acquirer hopes to realize synergies and increased value that justify the premium, the initial benefits of the transaction, particularly in terms of immediate cash-out or stock value, favor the shareholders of the target. This dynamic is critical in negotiations, as both parties aim to secure the best terms for their respective stakeholders in the acquisition.