what typically happens to stock prices after an acquisition?

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this is coming from someone who is completely new to trading asking for information. i know the answer is "it depends" but from your experiences for a long time what is the normal trend you see?

company A buys out company B. company A has been trading at around $20/share. company B been trading around $5/share.

  1. if i own company A stock, what usually happens to it?
  2. if i own company B stock, what usually happens to it?
  3. where do i make more money for my shares? is it better to own A or B?

Comments (14)

 
Sep 6, 2012 - 9:52pm

Well, let's think it through. Does Company A have to outbid B's current market price to buy up a significant majority of the company? Yes.

What might that do to B's market price? Normally it goes up, right? When does it go up? Assuming liquid public markets, this happens as soon as informed investors hear a buyout rumor they believe.

What might it do to A's market price if the market gets word that A will be trying to buy something at a higher price than the market as a whole thinks it's worth?

A lot of investors attempt to make money on this principle by going long B and short A before information spreads to the market at large. Some succeed.

 
Sep 6, 2012 - 10:12pm

Bankerella is alluding to the merger arbitrage spread; if there is a m&a announcement, the acquired company's share price will shoot up to a level that is still at a discount to the announcement price. This is roughly the market's estimation of the probability that the deal will not go through, to put it simplistically. If the share price shoots above the announcement price, then the market, roughly speaking, is expecting a counterbid.

I think GSPS was one of the first desks to popularize the trade idea in the 70's of long the acquired/short the acquirer to earn this spread; it's popularly called risk arb/merger arbitrage. The goal essentially is to hedge equity beta (and if you are truly rigorous, be Fama-French-Carhart neutral too) to earn event risk. It's not arbitrage in a strict sense, but rather a trade idea whose returns have a negatively skewed distribution with nasty kurtosis. Quite famously, it was one of the few strategies that LTCM was dabbling that did not implode during their meltdown.

 
Sep 6, 2012 - 10:29pm

Its not that simple, it all depends on your investment horizon.

If you are playing the merger-arb game then go long the company being acquired and short the acquiring company. Leverage to your heart's desire.

If you think the acquisition will provide a long-term/short-term/strategic benefit to the acquiring company then also go long the acquiring company. Many companies have pivoted through acquisitions and succeeded, at the same time, it’s a classic move by mature companies to try to grow earnings through acquisitions while overpaying. Yes, they can buy "earnings" but in the long run these will prove to be poor investments.

Going long the company being acquired = Pretty much always a smart move provided the deal goes through.

Going short the acquirer depends on the strategic value and investment timeline.

Mergers may be one of the few win-win situations on Wallstreet if done properly. That being said, the street has managed to line banker pockets and waste shareholder value at ridiculous level through these "deals".

-#Instagram millions

 
Sep 6, 2012 - 11:31pm

One of the weird anomalies of merger arbitrage is that acquiring companies actually tend to outperform the general market from the time of announcement to completion--i'm sure there can be fundamental storytelling to explain that away deal by deal.

Actually, kid, if you're still in school, here's a thesis topic: try to prove/disprove a more general argument involving acquiring companies loading significantly on stylized quality factors in market cycles that quality outperforms. More nuanced analysis might reveal that if you break it down by cash deals versus stock for stock deals etc. the acquirers using cash deals might outperform than their stock deal peers.

 
Sep 10, 2012 - 10:36pm

bankerella:
syntheticshit:
Try to prove/disprove a more general argument involving acquiring companies loading significantly on stylized quality factors in market cycles that quality outperforms.

I have two expensive finance degrees and a decade in the industry. I have no idea what you just said there. But it sounds really fucking buyside.

lmao got me there bankerella...a quant's approach to merger arb and M&A patterns, I'm sure somebody has tried it at some point.

 
Sep 11, 2012 - 2:52am

wtf, you monkeys are looking at this problem in a way more complicated way than it actually is

if the market expects counter bid, then u lose money long A
if market doesnt expect counter bid, then you make money long A

if market thinks B's acquisition of A does not add value, you lose money,
if market thinks B's acquisition of A does add value, you make money long B

dont worry about the acquirer paying cash and what not, yes paying cash generally is a strong indicator of the confidence on the deal; but thats not what the question is about so dont worry

 
Sep 11, 2012 - 7:50am

merger arbitrage is a no go for most quants. You're playing against insiders, which you can't beat. Some people will have ways of working out whether or not the merger will go ahead, but ultimately it is in the realms of a few human decision making, and not market forces.

Compared to the safer havens of arbitrage and stat arb, this is a very poor allocation of resources.

Quants tend to rely on either high N and a P better than half, or a lower n and a p nearer to 1, scaling into the factor where the consequences of q are acceptable. (npq being the standard abbreviations for number of attempts, probability of success, probability of failure). There are too many qualitative factors in merger arb for it to have any meaning. I don't believe you the patterns behind the data on it have any underlying factors for it, or strong enough correlation for them to give you enough of an edge to trade on.

 
Sep 13, 2012 - 7:06pm

trazer985:
merger arbitrage is a no go for most quants. You're playing against insiders, which you can't beat. Some people will have ways of working out whether or not the merger will go ahead, but ultimately it is in the realms of a few human decision making, and not market forces.

Compared to the safer havens of arbitrage and stat arb, this is a very poor allocation of resources.

Quants tend to rely on either high N and a P better than half, or a lower n and a p nearer to 1, scaling into the factor where the consequences of q are acceptable. (npq being the standard abbreviations for number of attempts, probability of success, probability of failure). There are too many qualitative factors in merger arb for it to have any meaning. I don't believe you the patterns behind the data on it have any underlying factors for it, or strong enough correlation for them to give you enough of an edge to trade on.

Interesting take, I was just drunkenly speculating at the time--I am sure somebody somewhere has tried this approach already. Of course, yes, I realize that if I dig into the data using more sophisticated quantitative techniques and happen to find anything, I will be accused of data-mining by the qualitative people in the room who specialize in merger arbitrage. And no worries, I don't specialize in merger arb haha.

 
Sep 13, 2012 - 7:07pm

What happens to seller debt after acquisition? (Originally Posted: 04/26/2015)

Sorry for the basic question - but I've always modeled the debt rolled over...but want to understand what the seller actually gets. For example

  • EV for the company is $15.0MM
  • There is $5.0MM in bank debt

= The seller takes home $10.0MM

Am I correct in this understanding?

 
Sep 13, 2012 - 7:10pm

When you say "highly seasonal ABL" , the first thing that pops into my head is things like inventory in retail. Like the "spring collection" has just come in so inventory spikes up.

Typically something like this is negotiated into the sales and purchase agreement as a working capital adjustment. The parties negotiate a peg as to where the WC will be at close.

 
Sep 13, 2012 - 7:11pm
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