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Why does the stock price decline when a seemingly promising acquisition is announced & agreed on?

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    Nobody has any clue, at all, why stock prices go up or down. – Fattie Oct 23 '16 at 14:05
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    Welcome to Money.SE. Please take the tour to see how the site works and what questions are on topic here. This question is likely to be closed as opinion, although it may be possible to reword it to be more general. – JTP - Apologise to Monica Oct 23 '16 at 14:21
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    @JoeTaxpayer Excuse me, but the site describes itself as a site for those "who want to be financially literate". This question seems to be a good fit, but how can I know in advance that this question is primarily opinion based if don't know about stock market dynamics? I don't know anything about stock markets, and this question feels like it can be answered objectively by explaining some kind of dynamic, but I wouldn't know about whether this statement is true. I'm sure if I asked "Why don't prices rise if a product sells less to compensate for a loss of profit" it wouldn't be opinion based. – Hay Oct 23 '16 at 23:13
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    @DanielAnderson no, Joe Blow is correct. Correlation does not imply causation, and sometimes stock prices move completely contrary to what a reasonable narrative would suggest. – Jared Smith Oct 24 '16 at 17:42
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    @Hay - typically, questions about particular stocks are off topic, both as matter of opinion, and for the fact that such a question is time-sensitive. What I tried to imply to the OP was that the question, if closed (which it seems not) could be worded generically, avoiding the mention of a particular stock. Else, this question might be repeated every time there's a takeover announcement and either stock drops. Thank you for your concern. – JTP - Apologise to Monica Oct 25 '16 at 0:14
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It is not unusual for the acquiring company's stock to fall in any time of merger announcement. Some of it has to do with the fact the acquirer is going to either take on new debt to pay for the cost of the acquisition or they will need to issue new shares. Either is dilutive to shareholder value, so this is "baked into" the process.

In the instant case, I'm not sure AT & T is making the right move. Because of its acquisition of DirecTV several years ago, there's little question it will have to shed assets in order to satisfy regulators, and there's a high probability that competitors will move to block the merger for obvious reasons. There is also the distinct possibility that regulators (either U.S. or European) may block the merger altogether, in which case there's undoubtedly a provision in the merger agreement requiring AT & T to pay a substantial fee to Time Warner.

There's a great deal of uncertainty surrounding acquisitions like this. After all, it wasn't helpful to Time Warner when it merged with AOL, and there's no assurance this merger will work out any better.

The long and short of it is that nobody knows how this merger will play out, and the amount of attention and resources necessary to complete it will be an enormous drain and distraction to AT & T, so there's the possibility its businesses may suffer somewhat. Since nobody knows the extent of divestitures AT & T will have to make, it creates uncertainty.

This is what you're seeing in their stock price.

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    And what investors dislike the most is uncertainty. – chili555 Oct 24 '16 at 0:58
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    Is issuing new shares and using the money raised to buy a business actually dilutive? Surely you just go from 0.00000015% of a billion dollar company to 0.0000001% of a 1.5 billion dollar company? I don't think it matters whether the company is buying up the other with cash, debt, or stock issuing. – Scott Oct 24 '16 at 4:17
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    "...its acquisition of DirecTV several years ago...." Um, you mean that acquisition that officially concluded in July 2015? (And it only started in May 2014, though I guess two years does qualify as "several.") – Wildcard Oct 24 '16 at 9:16
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    @Scott if they issue stock, it will almost certainly be at a discount to the market, and therefore cause the price of outstanding shares to fall - in which case it is no longer a $1.5 billion company. If they issue debt it won't be directly dilutive but the interest payments will be costly, again eroding market capital and hence share price. – fantabolous Oct 24 '16 at 13:32
  • @Scott, the reason new stock issues are dilutive is because it puts more supply into a market that may not have any additional demand. This causes the value of all the stock to decline, thereby diluting the value of shares held by shareholders prior to the issuance. Taking on debt is dilutive because debt servicing costs reduce net earnings, thereby reducing EPS. Debt may also inhibit a company's ability to pay dividends, which further erodes shareholder value. – Daniel Anderson Oct 24 '16 at 13:43
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Markets are generally skeptical of the benefits of mergers. History shows that the benefits of merger claimed by the company doing the purchase rarely materialise.

If on the day prior to the announcement the markets value company A as 50 billion and company B as 20 billion, then the market values the combined company at 50 + 20 = 70 billion if they see no benefit in merger.

Therefore, if company A is willing to pay a premium of, say, 5 billion for company B, then the market will mark down company A by about the same amount in order to maintain a combined value of 70 billion.

Of course this assumes that the markets see no real benefit in merging the two companies. This is not always the case.

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Typically, stocks are falling because more people try to sell than to buy. Why they try to sell is anyone's guess.

In this case, it seems that not everybody shares your optimism; you might not have all the info, or you are evaluating the data differently than others.

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"Buy the rumor, sell the news". That's often a good strategy, since most people tend to be optimists rather than pessimists, and reality turns out to be worse than they hoped for.

It's also a good strategy, because if the majority of other investors think it's a good strategy, the price will rise when they all try to buy, and fall when they all try to sell.

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It's a material change to the company's financials, why wouldn't there be a change in the company's value?

In general the company being acquired sees a value increase. This happens for a variety of reasons, most obviously the concept that a premium on the value will ensure shareholder approval of the acquisition.

In general the company making the acquisition sees a decline in value. This happens because of a usually material change in the financials. Maybe a big spend down of cash, maybe a big issuance of new shares, maybe a new debt obligation, maybe the company being acquired has new liabilities etc. Usually companies are valued based on some multiple of forward earnings and a big change in the financial situation of the company will change it's forward net earnings.

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