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The stock of this company, Karuna Therapeutics, rose on 12/22/2023 from around 220$ to 320$ because it is being acquired by a bigger biotech company.

https://finance.yahoo.com/quote/KRTX/

From the volume data on that date, obviously a lot of people sold their stocks for a very nice 45% unexpected profit.

Here's the problem though. In order to get that 45% profit, somebody else had to be willing to buy the stock at 320$. But why would anyone do that? The price obviously will not rise because the company is being acquired, and once acquisition is complete they will get the 320$ back per unit of stock, so no advantage there. There's also the risk that along the way the acquisition falls apart, resulting in declining stock price. Can somebody explain what is going on because purchasing this stock at 320$ looks like financial suicide to me.

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    Could you drop everything else a rephrase the Question title? Why would there not be buyers for a stock of a biotech company that was recently acquired? Dec 28, 2023 at 19:17

2 Answers 2

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It appears that the stock rose to just under $320 ($318.75 is the current 52 week high on the Yahoo link you posted). The company is being acquired for $330 per share. Someone who bought at $318.75 is presumably expecting that they'll get an $11.25 profit when the deal closes at the risk of losing ~$100 if the deal falls through and the stock goes back to its earlier levels. If you think there is a 90% chance that the deal goes through, that's a bet that has a positive expected value.

Of course, it is also possible that someone else jumps in with an offer above $330. And it is possible that seeing a large company make a $14 billion offer would cause the stock price to settle above $220 even if the deal falls through. Investors now know that Bristol Myers has done enough analysis on the company's new drug to make this offer so investors increase their profitability expectations. So there may be greater upside and lower downside possibilities.

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  • Good answer but 11.25 is only a 3.5% profit so I'm not sure where the 90% chance comes from.
    – JimmyJames
    Dec 28, 2023 at 18:49
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    @JimmyJames - If you assume that the choice is either an 11.25 gain or a 100 loss, that's a positive EV if there is a 90% chance the deal goes through. It's mathemetically equivalent to say you're looking at a 3.5% profit vs a ~31% loss which has positive EV if the profit is 10x more likely than the loss. Of course, you're guessing how big the loss would be-- like I say in the following paragraph, it is possible that the downside is less than a $100 loss. Dec 28, 2023 at 19:03
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    Ah, right, that makes sense. I was assuming the potential of a 100% loss which isn't a reasonable expectation.
    – JimmyJames
    Dec 28, 2023 at 19:08
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Well the company that's acquiring them has to buy the stocks when it does the acquisition.

Typically in an acquisition, the stock price rises to just below the acquisition price until the acquisition happens. Which it is now - it's $317.19. You can make $2.81 per share if you buy the stocks now, then wait until acquisition.

The risk is that it might not happen and then you might lose $100 per share. The ratio between $2.81 and $100 is how certain the market is, that the acquisition will actually happen.

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    The other answer makes it clear (with a source) that the actual acquisition price is $330 - I guess the OP was misinformed/misunderstood. Dec 27, 2023 at 18:21

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