RE: 20% DISCOUNT22 Aug 2019 18:40
Stock Prices Can Change Even After A Merger Is Announced
A common question relative to M&A activity and its affect on stock prices is why the acquisition target’s stock price does not equal the value the acquirer will be paying. In other words – if company A is buying Company B’s stock for $10 a share in a few months, why doesn’t Company B’s stock equal $10 immediately following the announcement?
Uncertainty Can Lower Prices
The differential between an M&A target’s acquisition price per share and its current trading price accounts for the uncertainty around the merger. If the purchase never actually happens, the target’s stock will likely drop significantly. In the video, I will cover another case study of a stock that was going through a deal of its own at the time of recording.
Hostile Takeovers Are Even More Uncertain
The more uncertain the actual merger is, the wider this delta or differential will be. For example, if the target company is being subjected to a hostile or unsolicited takeover the difference between the acquisition stock price and the current stock price will be very wide as management works to fend off the acquirer or attract a “white knight” to rescue it from the larger firm.
Sometimes the Acquisition Target’s Stock Will Rise Above the Takeover Offer
This can happen when traders believe that there is likely to be another bidder that will offer more for the firm. This is a more unusual situation but it will happen from time to time when the deal would give the winning bidder a significant competitive advantage.
Think Before Trading
It may be tempting to take advantage of the differential by buying the target’s stock and shorting the proper ratio of the acquirer’s stock. That strategy has a very poor risk/reward ratio as the downside can be many times the possible upside. Long Term Capital Management (the trillion dollar hedge fund bailed out by the Fed in the late 1990’s) famously built a problematic portfolio of highly-leveraged versions of this trade.
Link to Article:
<https://www.learningmarkets.com/how-mergers-and-acquisitions-affect-stock-prices/>
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