Does the price of stock rise or fall, when that company is purchased by a larger one.?

Answer 1

Despite what others here tell you, it doesn't usually fall. Who would sell shares to a company when the market will pay more? There are three situations:

1. The company being bought is in trouble. In this case, the company being bought will already have a depressed stock price. The company that is buying them will not usually pay very much above the market price -- so there will be little or no gain for stockholders of the first firm.

2. There is only one company trying to buy the firm -- and the firm is not in trouble. In this case, there are probably synergies to joining the companies -- meaning the combined firm is more valuable than the separate firms. Prior to the WIlliams Act in the mid 1960s, acquiring firms could capture most of those gains for their own shareholders, buying the other firm for a slight premium over the market price. This was because they could close the deal within three days of announcing it -- so they would announce on Friday and close on Monday. After the Williams Act, they had to give more to the firm being bought. The surplus is usually split pretty evenly -- so the stock price of both firms goes up.

3. More than one company wants to buy the firm. In this case, there is a bidding war. Almost all of the surplus goes to the shareholders of the firm being bought. Their price goes way up. The stock prices of the bidding firms usually goes down. Once the deal is done, the winning company's stock usually stays depressed -- but the losers' stock prices usually jump back to where they were.

Answer 2

That depends upon lots of things. Most importantly is how the investment community views this buy out. When a larger company buys a smaller company, they much 'purchase' all the outstanding shares and convert them to their stock. The obvious is that if a company A is buying company Z and the current price for Company Z's stock is $5 but they buy out is for $8 then obviously the stock price for Company Z stock will rise to some degree.

However, depending upon how the investement community views the end result merged company future, the stock price could rise above or sink below the proposed $8 buyout before it ever happens.

A buyout is generally good for a short tem risk if the buyout terms are higher than the current price, however, the may not always be the case.

Hope this helps!

Answer 3

Yes its a complex question, which implies a complex answer. However, we can simplify it into a couple simple points which all deal with investor perceptions of the deal.

1. If a large company that has not been performing well buys a smaller company that has been innovative and performing very well, then the large companies stock will likely go up and the smalll company stock will go down. The reverse situation usually holds true also.

2. Potential cost savings or synergies. If the companies appear to have common costs that can be reduced when they merge complementary skills that will increase the combine company's capabilities, then both stock prices will rise. If there do not appear to be any benefits (the reverse situation) then both stocks will decrease in price.

Answer 4

Historically the price of the company being purchased will adjust upward some 16%, while the larger company's stock will decrease. This is based on statistical data, and why you will see a run-up in price as soon as the market gets word of a possible buyout.

Answer 5

In US the price goes up. In India things are different. Due to lot of factors price may not go up. The factors can be negative. The negative means insider trading or wash activities. In US it goes up because it is a fully efficient market where everyone gets the information simultaneously and usually take over happens on increased price and price go up. Here for tactical reason it happens and either the public comes to know of the complete information of the merger much later than the insiders and by that time all the price might have been taken advantage of by the insiders or sometimes for other non transparent reasons price is suppressed by the powers to be. I had burned my hand in the Hindalco-Indal merger and I know it personally.

Answer 6

As others have mentioned, it's complicated.

But the simple answer is, it usually rises, at least in the short term.

Don't misconstrue this to mean that it is guaranteed to rise. Investing involves taking risks. But the most probable result is that the price of the purchased company will rise.

Answer 7

Usually the price of the purchased company goes up as the buyers must pay a premium to make a majority of shareholders of the target company give up their shares.

Answer 8

that would depend on what the new parent company does with the smaller business. if the smaller business is dissolved and sold, stocks will rise for a short time and then crash as all the pieces are eventually sold. if the smaller business is maintained by the parent and continues business under new management, it has the same or possibly an even grater earning potential.

Answer 9

Both can happen, it is complex to explain, but it all depends on how much people are willing to buy that certain stock for (the bids) and how much they are willing to sell it for (the calls). Typically the market price of a stock is in the middle of these.

Answer 10

it depends on the sucess of the company that is doing the buying and the projected profitability of the new comany.