When buying out a company why does the buyer's stock drop?

Question

I wil explain it more clearly w/ example;

Microsfot was going to buy out yahoo. Yahoo shares jumped when investors heard of this, and microsofts stock fell.

Why does the person who's buying (in this case microsoft) stock go down?

Why does the person selling (in this case yahoo) price go up?

Thanks

Answer 1

The buyer must pay a premium to the market to corner the stock, that is why the seller's stock is going up.  In your example, Microsoft offered $30 or so when the market value was in the low $20's.  Investors bid up the stock because they may get paid $30 by Microsoft.

Since Microsoft is overpaying for an asset, investors do not like it and lower their valuation of the buyer's stock.

Answer 2

The co who's buying is outlaying a lot of money - reducing cash reserves and putting their assets on the line for a possibly risky venture.  

The co who's being bought will have a set purchase price per stock, so it will always go up to that set price.  For example, Co. A offers to buy Co. B for $35 per share, which is $5 more than Co. B traded for today.  So - people will want to purchase Co. B stock today for $30 per share because they know they will definitely get $35 per share at a later date.

Answer 3

Dilution of earnings, distraction of the merger/acquisition process, etc.

Answer 4

Maybe because investors realise takeovers don't usually work. You may get a clash of the two management styles, difficulty in integrating employees, consolidating offices etc., redundancies. Some say 1+1 =3 because of synergy., but it rarely happens.

Answer 5

Because often the shareholder's don't see the value a buyout of another company will bring.  And there's good reason for this.  Many high profile buy outs tend to add no value whatsoever.  Some that I can think of off the top of my head are:

HP buying Compaq

Daimler Benz buying Chrysler

Time Warner buying AOL, or maybe it was the other way around.

In Microsoft's case, I can see why the MS shareholders would be concerned.  Yes, Yahoo is a big web presence, but will a big web presence really benefit MS?  What will that do to the entire online effort MS has made to date?  Seems to me, MS's entire online effort will become wasted at that point.