Share Price Dynamics in M&A Deals

In this tutorial, you’ll learn how the buyer’s and seller’s share prices change when M&A deals are announced and when they close. You’ll also learn a simple rule of thumb you can use to predict how a buyer’s share price might change.

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Table of Contents:

1:48 How the Seller’s Share Price Changes

3:55 How the Buyer’s Share Price Changes

10:16 Facebook / WhatsApp Example

12:01 Recap and Summary

Lesson Outline:

Question: “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?”

Answer: It’s easier to explain this for the seller in an M&A deal, so we’ll start there and then go into what happens to the buyer.

The Seller

The seller’s share price will almost always move closer to the offer price.

EX: The company’s share price is $7.00, you offer $10.00 / share for it – the price will almost always jump to $9.90… or $9.80… or something close to $10.00.

This is because the seller is now worth close to whatever you’re offering for it. It won’t be exactly $10.00, though, because there is a chance the deal may not close.

The Buyer

The buyer’s share price 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?

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. There are now 135 total shares outstanding, since the buyer’s share still exist, the seller’s shares disappeared, and 35 new shares were issued.

BUT… what does the market think the Combined Company is worth?

If it thinks the combined company is worth more than $1,350, the share price will increase because the # of shares outstanding is fixed – so the share price must go up.

But if it thinks the combined company is worth LESS than $1,350, the share price will decrease because the # of shares outstanding is fixed – so the share price must go down.

So if the combined company is worth:

$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.

A good real-world example of this is the Facebook / WhatsApp deal – Facebook’s stock price rose, fell, and then rose again in between when the deal was announced and when it closed, all based on investor sentiment.

Your Homework Assignment

What happens in a 100% cash or debt deal?

We simplified it here to look at a 100% stock deal, but how do these share price dynamics change when the buyer uses cash or debt or some combination of those instead?

RESOURCES:

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