Price behavior after announced acquisition | Finance & Capital Markets | Khan Academy | Summary and Q&A

TL;DR

In a share transaction, company A intends to acquire company B for $60 million in shares, leading to a potential increase in the stock price of company B.

Key Insights

• 👻 Share transactions in mergers and acquisitions allow companies to acquire other companies without using cash.
• 🤝 Offering a premium to the target company's market cap in a share transaction makes the deal more appealing to shareholders.
• 🎯 The market price of the acquiring company's shares before the transaction closing can impact the value of shares received by target company shareholders.

Transcript

Male: We finished the last video with the scenario where company A wants to buy company B, but they're not going to do it with cash, they're going to do it with their shares. They issue a press release saying that company A intends to acquire company B for $60 million in A's shares. They want to give a price that's a premium to company B's current ... Read More

Questions & Answers

Q: How does a share transaction work in acquiring another company?

In a share transaction, the acquiring company issues its shares to the shareholders of the target company, rather than paying with cash. This allows shareholders of the target company to become shareholders of the acquiring company.

Q: Why does Company A offer a premium to Company B's market cap?

Offering a premium to Company B's market cap makes the acquisition offer more attractive to Company B shareholders, increasing the likelihood that they will agree to the transaction.

Q: What determines the value of the shares Company B shareholders receive?

The value of the shares Company B shareholders receive is dependent on the market price of Company A's shares at the time of the transaction closing. If the price increases, the value of shares received will be higher, and vice versa.

Q: How does the stock price of Company B behave after the announcement of the transaction?

Assuming everyone believes the transaction will occur, the stock price of Company B should immediately jump up to $60 a share, and thereafter, trade at twice the value of Company A's shares.

Summary & Key Takeaways

• Company A plans to acquire Company B for $60 million in shares, at a 20% premium to Company B's current market cap.

• Company A will issue 2 million new shares, potentially valued at $30 per share, instead of raising cash to acquire Company B.

• If the market price of Company A's shares increases or decreases before the transaction closes, the value of the shares Company B shareholders receive will be affected.