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Per Investopedia's Acquisition Article

When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. In general, the acquiring company's stock will fall while the target company's stock will rise.

Is there any special case that the opposite would be true?


Example:

[JP Morgan’s Harlan Sur has an outperform rating on Micron] driven by growing optimism around an improving operating environment, a cheap relative valuation, and speculation M&A could pick-up in the semi space following the break-up of the [Qualcomm]/[Broadcom] deal,” referring to speculation by some that Broadcom could go after Micron since its hostile bid for Qualcomm was scuttled.

What aspects of an Acquisition deals must be taken into account to predict the Markets' reaction.

Note: Again, I'm only asking about the immediate short term (acquisition signing to 6 months after).

  • can any down voters comment reason, so that I may improve. – Dustin Mar 16 '18 at 16:58
  • Please explain how the acquiring company could buy shares at less than market value. – paparazzo Mar 16 '18 at 17:48
  • I think paparazzo is pointing out that in order to transact you couldn't offer less than market for the company. Who would agree to sell their shares at a loss, especially to someone who wants what you've got? However, over the next post-transaction 6 month time frame, sure the acquired company stock might fall even though it was purchased at a premium to market at the time of transaction. – quid Mar 16 '18 at 17:52
  • If acquisitor is acquiring company then yes. Come on, man. – paparazzo Mar 16 '18 at 17:54
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Nothing in the stock market happens "always." However, there is some logic behind typical changes to enterprise values in the event of mergers and acquisitions.

For the company being acquired, acquisitions need to be approved by the board and shareholders. To give incentive to the board and shareholders an offer of acquisition will typically be above the current market price.

As for the offering company, depending on the size of the company being acquired, the books are about to change pretty radically, generally with the inclusion of new debt. On this point, it's pretty important to remember that an acquisition is just trading some assets for some other assets of, presumably, the same value. I'm giving you $1,000 for your $1,000 operation. With that in mind it's not fair to say the price decreases because the company just spend it's money, I've seen this argument before. The issue and cause for near term decline really is the various changes to the balance sheet, the makeup of the assets, and generally, inclusion of new debt.

Scale is very important to this. If Apple buys a $10B company with cash, it's pretty insignificant. The company being acquired will probably have a value jump, Apple stock probably wouldn't even change. When it gets closer to a merger of two companies of comparable size than an acquisition the impact to the value of the companies involved gets more obvious.

Again, these are rules of thumb, not guarantees, do your due diligence.

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Per Investopedia's Acquisition Article, they state that in the immediate short term the acquirer's stock price drops and the target's stock price rises.

If analysts believe that the synergies are good, the acquirer may rise as well and if the acquired company is in financial difficulties, the acquisition price may be at current price. I have been subscribing to EOD data for 25+ years and although these occur, they are more the exception rather than the rule.

  • " if the acquired company is in financial difficulties, the acquisition price may be at current price." So the worse off the target company is, the less rise it will experience? – Dustin Mar 16 '18 at 15:00
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    You can't quantify this with some set of rules. Most of the time, the acquisition price is higher than current price. Sometimes it's not. As another example, suppose a stock has risen in anticipation of a take over but rose beyond the buy out price? It then drops a bit after the announcement. Can I source this? No. All I can tell you is that I have seen it occur before deleting the acquired company from my database once it no longer trades. – Bob Baerker Mar 16 '18 at 15:54

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