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Learn/M&A & Merger Modeling/Module 3
3.1·6 min read

The Purchase Premium

On close, the target's assets are re-valued to fair value. The amount paid above net tangible book value is the purchase premium that must be allocated.

By the end you can
  • ✓Define the purchase premium
  • ✓Explain why acquisition accounting re-values assets

When a deal closes, the buyer can't just keep the target's old book values. Under acquisition accounting, the target's assets and liabilities are re-stated to fair value, and the price paid above the has to go somewhere.

Purchase Premium=Offer Value−Net Tangible Book Value\text{Purchase Premium} = \text{Offer Value} - \text{Net Tangible Book Value}
Net tangible book value = tangible assets - total liabilities.
Purchase Price Allocation (PPA)

The process of spreading the across asset write-ups (PP&E, intangibles) and, for whatever is left over, goodwill. It's the bridge between the price paid and the combined balance sheet.

Worked example · Find the premium
Given
  • •: $4.0B
  • •: $2.0B
Solution
  1. 1.
    4,000−2,000=$2,000M4{,}000 - 2{,}000 = \$2{,}000\text{M}
Answer

$2.0B of has to be allocated to and .

Check yourself

Offer value $900M, net tangible book value $350M. Purchase premium:

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Sources & Uses
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Write-Ups, D&A & the DTL