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 is a leveraged buyout different from a buyout?

    Learn about leveraged buyouts and circumstances under which an acquiring company wishes to pursue a buyout funded mostly ... Read Answer >>
  2. How can I develop a profitable merger arbitrage strategy?

    Learn how to utilize a simple merger arbitrage trading strategy to profit from the typical temporary price discrepancies ... Read Answer >>
  3. How does a company decide whether it wants to engage in a leveraged buyout of another ...

    Learn how leveraged buyouts can be profitable by taking companies private, and understand why the debt loads in these deals ... Read Answer >>
  4. Why do some mergers and acqusitions fall through?

    Most merger and acquisition (M&A) activities are carried out successfully, but from time to time, you will hear that a deal ... Read Answer >>
  5. What do the bid and ask prices represent on a stock quote?

    Learn what the bid and ask prices mean in a stock quote. Find out what represents supply and demand in the stock market and ... Read Answer >>
  6. What's the difference between a merger and an acquisition?

    Learn about the difference between mergers and acquisitions. Discover what factors may encourage a company to merge or acquire ... Read Answer >>
Related Articles
  1. Small Business

    How To Profit From Mergers And Acquisitions Through Arbitrage

    Making a windfall from a stock that attracts a takeover bid is an alluring proposition. But be warned – benefiting from m&a is easier said than done.
  2. Investing

    Negotiating the Bid

    A bid is an offer investors make to buy a security.
  3. Investing

    The Merger - What To Do When Companies Converge

    Learn how to invest in companies before, during and after they join together.
  4. Trading

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  5. Retirement

    Buyout Offer? 12 Ways to Tell If It’s Good

    When you are presented with a package, take a close look at these elements – and be sure to negotiate, if possible.
  6. Personal Finance

    Why We Need Antitrust Laws (MSFT, AAPL)

    A look at antitrust laws in the United States and the many anticompetitive practices they safeguard against.
  7. Investing

    The Merger: What To Do When Companies Converge

    Mergers occur when it’s beneficial for two companies to combine business operations. The question is; if you’re invested in a company that’s involved in a merger, will it benefit you?
RELATED TERMS
  1. Friendly Takeover

    A situation in which a target company's management and board ...
  2. Bust-Up Takeover

    A corporate buyout in which the acquirer sells off a piece of ...
  3. Employee Buyout - EBO

    A restructuring strategy in which employees buy a majority stake ...
  4. Mergers and Acquisitions - M&A

    A merger is a combination of two companies to form a new company, ...
  5. Takeout

    A slang term denoting the purchase of a company through an acquisition, ...
  6. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  3. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  4. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
Trading Center