How do corporate buyouts/mergers effect stock prices...?

Question

I know they usually go up (and I know sometimes can go down), but what are the mechanics of the transaction?

That is to say, if company Y is about to buy company X for price P per share, how many shares does it end up buying? from whom does it buy them- individual shareholders or insiders or a bit of both? What percentage of shares outstanding does it buy?

If it decides to buy N shares for price P, how does it acquire a presumably large quantity of N shares at price P without experiencing volume-induced price increases of its own?

How do companies decide how much to pay per stock?

When a company is bought out, does simply mean that ALL of its stocks are bought out?

Thanks in advance!

Answer 1

In most cases, any individual or company needs to be a majority share-holder to gain controlling interest in the to-be-acquired company. So, for small companies that could mean 51%. In other very large companies with fragmented shares, it could be as little as 15-20% or even lower.

The acquiring company usually looks at the existing stock price of the target company, and based on the strength of their desire to purchase presents a premium on top of that share price to entice existing share-holders to cash in instant profits. In some cases it can even be double the existing share price.

The stock value, intrinsically according to Fundamental Analysis, should reflect the Present Value of future earnings (through dividends) for the shareholder. While technical analysts take other factors into consideration as well, like market sentiment, cash flow levels, etc, their base analysis is performed through fundamental analysis.

After a merger, analysts study the new venture to provide an opinion on whether the long-term prospects of this new entity will be positive or negative. This is quite a subjective and tedious process, which yields different results for almost every analyst. However, they are all able to determine what they think future earnings are going to be, and the present value of that dividend stream should be the target stock price after the merger. Depending on what the real stock price is, they purchase/sell the stock till it adjusts to their target range.

So, while some mergers are obviously advantageous, for others it can take a very long time to determine value. This leads to price fluctuation based on subjective yet educated analysis.