Merger Deficit
Categories: Bonds
Usually, when one company buys another one, it has to pay a little extra. This amount is known as a "premium." So...you run a major candy conglomerate and you want to buy a firm that makes organic soy-based ilk Duds knock-offs. When you look at the balance sheet, you see that the company has a book value of $5 million. But to purchase it, you have to include a premium. So, after some negotiation, you end up paying $7.5 million.
A merger deficit represents the opposite situation. Instead of paying more than the book value for the acquisition, you end up paying less...$4 million to buy a $5 million company.
Theoretically, it could just mean you got a good deal or that you're the LeBron James of merger negotiation. But merger deficits often come up in more complicated scenarios. For example, if the merger is funded by money raised from a new stock offering, it can result in the book value of the purcahse company being worth more than the share capital offered up to finance the transaction. That leads to a merger deficit.