Inquiry:
Scenario: Company A announces acquisition of Company B at 10% premium.
Why might company's B share price trade below 10% premium?
Why might company's B share price trade above 10% premium?
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Below a 10% premium...the market has doubt that the deal will close, or at least sees the probability of close as less than 100% (perhaps due to antitrust concerns)
Above a 10% premium...not completely sure on this one - It could be that the market expects another company(ies) to make an offer for Company B at a purchase price that is above a 10% premium.
Apparently there should be several reasons.
I was thinking along the same lines. Not too sure if I am correct though.
Under 10% - market thinks the deal might flop Over 10% - overreaction on market, and market will correct itself
But apparently should have several reasons. Can't think of anything else. Thank you for your response none the less.
"market thinks the deal might flop" is an oversimplification, but you have the right idea...the market could think the deal has a really good chance of closing, and the stock could still trade at less than the 10% premium.
For example, say company A offered $50/share for company B. I'm an investor, and I think there's a 95% chance that the deal will close. Even though I'm pretty confident the deal will close, it wouldn't make sense for me to pay $50/share for company B if I think there's any chance at all the deal won't close. That 5% chance of the deal not closing means paying $50 per share wouldn't make sense (all else equal - the potential of offers from other companies can drive the stock price up).
Thank you
Or just costs of capital. Merger arb is mostly hedge funds. Even a 100% certain closing should trade at discount because of costs of capital. If I’m a hedge fund owner and the stock was 50 and the deal is at 55 and I can sell my shares at 54.70 I’m taking that price and moving on to next trade
The shorts just got burned and they need to buy to close.
Over 10% - Potential for a bidding war. Saw it with Whole Foods and Amazon when the share price of WF went above the offer price.
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