How do acquisitions affect stock prices?

[jrstafford1]

I am fairly new to stock trading and am wondering how acquisitions affect stock prices. For example, company "A" acquires company "B"...what happens to the stock price of company "A" and likewise for company "B". I assume their are multiple factors involved but could someone help me understand this situation please?

Thanks!

[aiki14]

Originally Posted by jrstafford1

I am fairly new to stock trading and am wondering how acquisitions affect stock prices. For example, company "A" acquires company "B"...what happens to the stock price of company "A" and likewise for company "B". I assume their are multiple factors involved but could someone help me understand this situation please?

Thanks!

Generally it's buyer down and buyee up. To acquire another company the buyer must either buy 51% of the stock on the open market, or get 51% of the stock by getting the owners of the 51% to agree to sell all at once. Since 51% of the stock is not usually on the market at the same time the second choice is usually made. The fact that less than 51% of the stock is on the market tells us that those folks believe the stock price will go up, and therefore a buyer must make an offer above the current price to be accepted.
This holds true for a privatization (where a buyer will take the company private) or an absorbsion (where a buyer simply makes the company a part of itself) as well. The difference in these cases is they require 100% of the stock. In this case a Board of Directors will vote to accept the offer and the stock will be liquidated at the arranged for price and all investors receive that price. The Murdoch/Dow Jones $60 offer is an example of the general case.
There are other permutations that can change the dynamic, but a pretty good majority of acquisitions will be as the above.

[jrstafford1]

Thanks for the reply. So based on the buyer down, buyee up scenario would it be wise to purchase "buyee" stock in the 1-2 months ahead of the acquisition with the idea that the stock price will go up when the acquisition is made? Am I making this too simple?

Based on my limited research so far of the two actual companies I am viewing, what you have said holds true. In this case, the acquisition is reportedly taking place late in the 3rd quarter. The StockScouter rating for the buyer is 3, while the buyee stock is rated as a 10.

As I said, I'm very new to this so any thoughts on this are appreciated!!