The process of acquiring another company is long and complicated. From the announcement of the deal to its completion, many factors can affect the stock prices of both companies, from risks of the deal falling apart to rumors in the marketplace to actions of speculators. Ultimately, whether the deal is done with stock, cash, or a combination thereof, at the end of the process the merged companies trade under only one stock symbol.
When a firm announces its intentions to buy out another company, the stock of the target company generally jumps in value, sometimes quite significantly. To entice companies to allow themselves to be acquired, the bidding company usually has to offer the target company and its shareholders a premium over the current stock price, leading to the rise in stock value.
When a stock buyout is announced, there is always a risk that the deal will not be completed. Acquiring companies can rescind their offer, shareholders might not offer their support, or securities regulators might not allow the deal.
As a result, stocks rarely trade at the actual price where a deal is announced. The size of the discount to the announced buyout price reflects the market's assessment of the risk involved in the deal reaching completion.
In between the announcement of the buyout offer and the deal's completion, the stock price of the target company will move in relation to a number of non-financial factors. Oftentimes, rumors hit the stock market about the progress of or difficulties anticipated with the deal, and these rumors tend to move the stock price up or down. If the deal is a stock deal rather than a cash deal, the target company's stock will tend to trade in line with that of the acquiring company.
If market participants anticipate that another buyer might emerge for the target company, the stock price can move above the price offered by the original suitor. If another buyer is indeed announced, the stock price then might move down, after having traded up in anticipation.
At the completion of a stock buyout, the target company's stock is canceled and shareholders receive a proportionate number of shares of the purchasing company, per the terms of the deal.
In a cash buyout, shareholders receive a dollar amount per share of their stock, which is then canceled and worthless.
John Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to writing thousands of articles for various online publications, he has published five educational books for young adults.