Buyouts or acquisition

[B Foxtrot]

noob question:

when a stock buyout is approved for a certain price, why doesn't the trading price of that stock automatically jump (due to buying pressure) to that value? If the deal is going down don't investors who buy late still stand to make a profit if they buy stock below the acquisition price?

[ghostryder]

noob question:

when a stock buyout is approved for a certain price, why doesn't the trading price of that stock automatically jump (due to buying pressure) to that value? If the deal is going down don't investors who buy late still stand to make a profit if they buy stock below the acquisition price?

Theoretically that usually happens. If the price doesn't jump close to the buyout price that is a sign that the market believes the deal will fall through or get repriced. BCE is a good example of that. On the other hand when the Alcan deal was announced the price did rise IIRC to very close to the buyout price. A sign that the market believed it was a "sure thing".

[pitz]

Basically ghostryder covered it. In addition to the risk premium, there is also a time premium, to wit: buyers of a stock expected to be taken over, logically, demand some return on the (often-borrowed) capital they have invested in the stock.

Sometimes the price jumps higher than the offer, reflecting speculative hope that a higher offer will emerge.

During the takeover process itself, if there is a substantial short interest in the stock, speculators will drive up the price in order to burn other investors who have taken a short position in the stock.

[BTron]

ghostryder and pitz basically hit the nail on the head. Just to delve into what pitz is saying with time-value, if a buyout is expected to take place, but not for another 3 months, with a cost of capital of say 4-6%, it would be perfectly reasonable for the stock to trade at a 1-2% discount of the buyout price even if it was a sure thing because investors could just put their money in T-bills and make the same rate of return.

It's a very good question though, one thing that's also very valuable to look into is if the acquisition is being made by another public company, how much their share price correspondingly declines. It can all get pretty complicated based on the variables, but a lot of money has been made and lost playing these situations.

[B Foxtrot]

wow, thanks for the insight everyone. Like Btron said, gets pretty complicated and I'm sure seasoned investors who capitilize on these takeovers have good reason for the things they do (or don't do).

[Thalo]

Ghostryder, BTron and Pitz basically hit the nail in the head, I'm just replying here because I like to hear myself type.