Can it be assumed that when one company purchases another for a price above the current price per share that t

Question

he company being purchased will have a corresponding immediate rise in stock price to near the offering price of the buying company?

Answer 1

For cash deals, Yes, the price of the selling company does often rise to just below the buyout price (People want that quick profit from the pre announcement price to the buyout price). Since there is always the chance the buyout will fall apart, the price usually does not rise all the way to the buyout price, but, (and there is always a but) I have seen the price rise above the buyout price when the new investors seem to think the buyout price is not high enough and they think (hope) some other company will show up and offer even more.

Answer 2

It dosesn't work that way. When a company takes over a company it doesn't want it's shares to get diluted. So it fixes an exchange ratio. Suppose Company A's price is $20 and B's 10 with same number of outstanding shares for simplifying. Then Comapany A will give one share of A for every 2 shares of B. Suppose if they started around 100000 each. The shares of B will get reduced to 50000 which is actually A's share. So the merged company consisting of A and B will have 150000 shares outstnading with price at $20 with no dilution for A. So it is not actually B's share moving up but their number comes down to equate to the Acquirers price.
The equation for big acquisition is
P/E of A x market price of A x number of shares outstanding = P/E of B x price of B x number of shares outstanding for B x X
Solving for X will give you how much the the outstanding shares of B should go up or come down so that there is no dilution.
This number multiplied by the outstanding share of B + the outstanding shares of A will give the number of outstanding shares of the merged A and B, post merger criteria. So you check up 1:a say which will give that post merger outstanding shares which will not dilute A's shares. Looks little complicated. The calculation doesn't stop here. For your answer it seems this suffices.
Theoretically there are two types of mergers one is stock swap merger which is explained above. Then there is cash merger where you pay cash for a companies shares and buy outright. Here there is no question of dilution since you pay cash for all the outstanding shares of the acquiree and in the post merger scenario the outstanding shares don't increase at all.