A:

The announcement of an acquisition or a merger does not necessarily mean that the deal will be resolved as originally stated. Speculation of the merger's final result will affect the state of the current share price. For example, if rampant speculation and analysis by the market suggests that another company may make a bid against the original acquirer for the target, the market may bid up the stock's current price to exceed the original buyout price in anticipation of a bidding war. If the market speculates that the target may not be purchased by anyone (for example, antitrust legislation may strike down mergers in the industry or a material financial change may occur to the acquirer/target, changing the attractiveness of the deal), the stock price may not move or may even fall after the initial buyout announcement.

However, if the market assumed that the acquisition will go through at the designated price, the current share price might be slightly off as a result of transaction costs. Traders may attempt some arbitrage by buying the stock, even at a small discount to the buyout price, if it means that they will be able to sell it to the acquirer to gain a small profit. This demand for the stock will slowly drive it up on the exchanges until the cost of the commission to buy the stock eats up the slight spread between the cost to buy the stock and the buyout price.

RELATED FAQS
  1. How long does it take to execute an M&A deal?

    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  2. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>
  3. What are some common accretive transactions?

    The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >>
  4. Are companies with high Book Value Of Equity Per Share (BVPS) takeover targets?

    Companies with high book value of equity per share (BVPS) can be good takeover targets if those companies are public and ... Read Full Answer >>
  5. What are some ways to make a distribution channel more efficient?

    While there are many ways to make a distribution channel more efficient, the three high-level ways to increase the efficiency ... Read Full Answer >>
  6. If a company offers a buyback of its shares, how do I decide whether to accept the ...

    Tender offers for share buybacks are often made at a premium to the current market price; it may be in an investor’s best ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    Dow Chemical: An Activist Investment Analysis (DOW)

    Read about how an activist hedge fund demanded changes at Dow Chemical. Learn about deal structure of the proposed merger between Dow and DuPont.
  2. Term

    What's a Vertical Merger?

    A vertical merger occurs when two companies that produce goods or services for the same finished product merge operations.
  3. Fundamental Analysis

    4 Reasons Small Cap Companies Are Actively Engaged in M&As

    Read about the reasons why smaller-cap companies actively take part in mergers and acquisitions (M&As). In addition to new synergies, they also access new markets.
  4. Entrepreneurship

    5 Boston Startups That Emerged This Century

    Learn why Boston is a hot market for startups, and familiarize yourself with a few of the top startups that have emerged from the city.
  5. Stock Analysis

    Staples: An Activist Investment Analysis (SPLS, ODP)

    Learn about Starboard Value LP's investor activism with Staples Inc. Find out what strategies were encouraged by Starboard and if the activism was successful.
  6. Stock Analysis

    5 Big Tech M&A Deals in 2015

    Read about five of the largest M&A transactions by total value in 2015, and learn a little about how the companies involved might fit together.
  7. Stock Analysis

    5 Big Food Industry M&A Deals in 2015 (KHC, KO)

    Read about some of the most important M&A transactions announced in the food sector in 2015, including one of the most talked about deals in any industry.
  8. Markets

    The Biggest M&A Deals of 2015

    Here is a summary of 2015 M&A activity and a look ahead at 2016.
  9. Investing Basics

    How Does a Tender Work?

    Tender usually refers to the process in which governments invite suppliers to bid for the right to work on large projects.
  10. Markets

    Top Investment Banks in the Sports Industry

    Find out why the top investment banks in the sports industry tend to be smaller niche players and are prepared to battle the Wall Street giants for business.
RELATED TERMS
  1. Vertical Integration

    When a company expands its business into areas that are at different ...
  2. Skinny Down Distribution

    Skinny down distribution is corporate practice of slimming down ...
  3. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. ...
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a ...
  5. Runoff Insurance

    An insurance policy provision that provides liability coverage ...
  6. Hunting Elephants

    The practice of targeting large companies or customers.
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
Trading Center