What is a premium-paid analysis, and how does it complement a DCF and trading comps in a takeover?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A premium-paid (or precedent-premium) analysis looks at the premiums offered over the target's unaffected share price in comparable past takeovers — typically one-day, one-week, and one-month premiums — to gauge what level of premium is market-standard for the sector and deal type. In a public takeover it complements DCF and trading comps because those value the business, while the premium analysis frames the price relative to where the stock actually traded before the bid — what shareholders will expect and what a board can defend. You apply the observed premium range to the target's unaffected price to get an implied offer range, then triangulate with the fundamental methods. Caveats: choose truly comparable precedents (similar size, sector, market conditions, cash vs stock), use the unaffected (pre-leak) price, and remember high premiums in the set may reflect synergies or competitive bids you can't assume. It's a market-reasonableness check on the offer, not an intrinsic value.
WHAT INTERVIEWERS LISTEN FOR
- ✓Premiums over unaffected price in comparable takeovers (1d/1w/1m)
- ✓Frames offer vs pre-bid trading, what shareholders expect
- ✓Apply premium range to unaffected price for implied offer
- ✓Use comparable precedents and the true unaffected price
COMMON MISTAKES
- ✗Using the post-leak (affected) price
- ✗Treating premium analysis as intrinsic value
- ✗Cherry-picking non-comparable precedents
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