buyer's share price
Share Price Dynamics in an M&A Deal • Question that came in the other day… • “Can you please explain to me, quick and dirty, how the share prices of 2 public companies normally change when an M&A deal takes place?
• Basically, how can I tell which share price will go up and which will go down?”
Share Price Dynamics in an M&A Deal • Don’t trust Investopedia!
How the Seller’s Share Price Changes • Seller: The seller’s share price will almost always move closer to the offer price • So… in that sense, Investopedia is right, because the offer price has to be higher than the current share price (otherwise, why would the company sell?) • EX: Company’s share price is $7.00, you offer $10.00 / share for it price will almost always jump to $9.90… or $9.80… or something close to $10.00
How the Seller’s Share Price Changes • Mitsui Sumitomo Insurance (Japan) / Amlin (U.K.)
• Can you guess the offer price?
How the Buyer’s Share Price Changes • Buyer: Depends on how much the market thinks the combined company is worth afterward! • Ex: The Buyer has 100 shares outstanding at $10 per share, for an Equity Value of $1,000
• It then offers the seller $7 per share for its 50 shares in an all-stock deal • How does the buyer’s share price change?
How the Buyer’s Share Price Changes • It depends! • The buyer issues 35 shares to do this, since ($7 * 50) / $10 = $350 / $10 = 35 shares • And the Combined Equity Value is therefore $1,350 • BUT… what does the market think the Combined Company is worth?
How the Buyer’s Share Price Changes • $1,350: The buyer’s share price stays the same. • $1,400: The buyer’s share price increases! • $1,300: The buyer’s share price decreases! • So… it depends heavily on market sentiment, and the buyer’s share price could “flip flop” quite a bit over time before the transaction closes
Facebook / WhatsApp • Facebook’s $19B acquisition of WhatsApp – good deal?
Facebook / WhatsApp • Maybe it was in the long term?
Whither Investopedia? • Not entirely wrong… but too much of a generalization:
Recap and Summary • Seller: Share price will tend to approach the buyer’s offer price, which means an increase • Buyer: Depends on the combined company’s Equity Value relative to the market’s perception of what it’s worth – share price could increase or decrease • Buyer: Depends heavily on shifting sentiments • Your Turn: What about in a 100% cash or debt deal?
• Basically, how can I tell which share price will go up and which will go down?”
Share Price Dynamics in an M&A Deal • Don’t trust Investopedia!
How the Seller’s Share Price Changes • Seller: The seller’s share price will almost always move closer to the offer price • So… in that sense, Investopedia is right, because the offer price has to be higher than the current share price (otherwise, why would the company sell?) • EX: Company’s share price is $7.00, you offer $10.00 / share for it price will almost always jump to $9.90… or $9.80… or something close to $10.00
How the Seller’s Share Price Changes • Mitsui Sumitomo Insurance (Japan) / Amlin (U.K.)
• Can you guess the offer price?
How the Buyer’s Share Price Changes • Buyer: Depends on how much the market thinks the combined company is worth afterward! • Ex: The Buyer has 100 shares outstanding at $10 per share, for an Equity Value of $1,000
• It then offers the seller $7 per share for its 50 shares in an all-stock deal • How does the buyer’s share price change?
How the Buyer’s Share Price Changes • It depends! • The buyer issues 35 shares to do this, since ($7 * 50) / $10 = $350 / $10 = 35 shares • And the Combined Equity Value is therefore $1,350 • BUT… what does the market think the Combined Company is worth?
How the Buyer’s Share Price Changes • $1,350: The buyer’s share price stays the same. • $1,400: The buyer’s share price increases! • $1,300: The buyer’s share price decreases! • So… it depends heavily on market sentiment, and the buyer’s share price could “flip flop” quite a bit over time before the transaction closes
Facebook / WhatsApp • Facebook’s $19B acquisition of WhatsApp – good deal?
Facebook / WhatsApp • Maybe it was in the long term?
Whither Investopedia? • Not entirely wrong… but too much of a generalization:
Recap and Summary • Seller: Share price will tend to approach the buyer’s offer price, which means an increase • Buyer: Depends on the combined company’s Equity Value relative to the market’s perception of what it’s worth – share price could increase or decrease • Buyer: Depends heavily on shifting sentiments • Your Turn: What about in a 100% cash or debt deal?
