When company A acquires all the shares of company B, do all the company B shares just sort of turn into company A shares? Since company B is now essentially a part of company A, do the company B shares maintain a unique share price identity? Can someone still go out in the market and buy company B shares, even after they belong to company A?

The company B shares cease trading once the merger is completed. In their brokerage accounts, those people now have 2 A shares for every one of their old B shares. The B shares do not maintain any unique identity.

If A just adds 2million new shares, wont the prices of all its shares get diluted and come down from 30 dollar per share?

No because you are also acquiring company B's assets.

Whenever a an acquisition is going to happen, are the people that are familiar with the deal (like the bankers and people of the boards of both companies etc.) prevented from buying shares in the company that will be acquired, before it's announced to the public? If not would this be considered insider trading? The reason I ask this is because it seems that whenever a company is acquired its shares tend to jump in price, so if I was a banker familiar with the deal what would prevent me from loading up on stock of the company being acquired and then selling it after the announcement and jump in price? Thanks.

That would definitely be insider trading, and people have gone to jail for doing it.

Please correct me in my way of thinking here but I would assume that the price would go as follows. If company B's assets are still valued at 50M after the acquisition (so assuming no synergies) then the total market value of company A's assets would now be 400M + 50M = 450M. Taking out the 100M in liabilities leaves a market cap of 350M which is distributed to the now 12 million shares of A's stock giving a price of 29,1666 for A. And hence B would be trading at 58,3333 rather than full 60. So in effect the value of the B stock would increase but the value of A stock would decrease because of the premium.

You are correct that that is how the book value of the stock will react. However, for most acquisitions, the market value of A will continue to go up, because A will now be better able to make a profit.

At 1:02, how do you issue shares? Do you just make a public annoucement that you're introducing more shares into the market, or is there a bunch of legal processes you have to go through in order to issue shares?

There are extensive regulations surrounding a public offering if it is being offered to "the public" in general, and you have to follow a certain process that includes registering the transactions, filing a prospectus with the SEC, and following certain rules while you market the shares. Transactions between certain private parties are different, and may not have many requirements at all.

What does it mean when Sal says, Company A is paying a premium to Company B?

A is paying B more than the price of B's stock was trading at before A came along wanting to buy it. That's a premium.

So, where exactly are all of these discussions happening and how can people be updated on these sorts of transactions happening? I've looked over the SEC's website and I found it a little overwhelming. Is it really just getting set up for updates on Yahoo and keeping a really close eye on what is happening in business? If that is so, how does someone conduct the right research on companies so that we might be able to become educated on the market so that we can make educated guesses on what is going to happen in the market?

You will never, ever, ever know as much as the professional investors do, so don't play a fool's game. If you want to invest in stocks, buy a diversified low-cost index fund.

Main content

Course: Finance and capital markets > Unit 6

Lesson 7: Mergers and acquisitions

Price behavior after announced acquisition

Name: Price behavior after announced acquisition
Uploaded: 2011-05-12T23:26:08Z
Description: Stock Price Behavior After Announced Acquisition with Shares

Google Classroom

Stock Price Behavior After Announced Acquisition with Shares. Created by Sal Khan.

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katieldouglass
Posted 12 years ago. Direct link to katieldouglass's post “When company A acquires a...”
When company A acquires all the shares of company B, do all the company B shares just sort of turn into company A shares? Since company B is now essentially a part of company A, do the company B shares maintain a unique share price identity? Can someone still go out in the market and buy company B shares, even after they belong to company A?
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(7 votes)
Answer
- TerryMHogan
  Posted 12 years ago. Direct link to TerryMHogan's post “The company B shares ceas...”
  The company B shares cease trading once the merger is completed. In their brokerage accounts, those people now have 2 A shares for every one of their old B shares. The B shares do not maintain any unique identity.
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  (13 votes)
kartik233bits
Posted 12 years ago. Direct link to kartik233bits's post “If A just adds 2million n...”
If A just adds 2million new shares, wont the prices of all its shares get diluted and come down from 30 dollar per share?
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(7 votes)
Answer
- M
  Posted 12 years ago. Direct link to M's post “No because you are also a...”
  No because you are also acquiring company B's assets.
  Button navigates to signup page
  (11 votes)
Cogito, ergo sum
Posted 11 years ago. Direct link to Cogito, ergo sum's post “Whenever a an acquisition...”
Whenever a an acquisition is going to happen, are the people that are familiar with the deal (like the bankers and people of the boards of both companies etc.) prevented from buying shares in the company that will be acquired, before it's announced to the public? If not would this be considered insider trading? The reason I ask this is because it seems that whenever a company is acquired its shares tend to jump in price, so if I was a banker familiar with the deal what would prevent me from loading up on stock of the company being acquired and then selling it after the announcement and jump in price? Thanks.
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(4 votes)
Answer
- Alf Lyle
  Posted 11 years ago. Direct link to Alf Lyle's post “That would definitely be ...”
  That would definitely be insider trading, and people have gone to jail for doing it.
  Button navigates to signup page
  (6 votes)
antti.myllykoski
Posted 9 years ago. Direct link to antti.myllykoski's post “Please correct me in my w...”
Please correct me in my way of thinking here but I would assume that the price would go as follows. If company B's assets are still valued at 50M after the acquisition (so assuming no synergies) then the total market value of company A's assets would now be 400M + 50M = 450M. Taking out the 100M in liabilities leaves a market cap of 350M which is distributed to the now 12 million shares of A's stock giving a price of 29,1666 for A. And hence B would be trading at 58,3333 rather than full 60. So in effect the value of the B stock would increase but the value of A stock would decrease because of the premium.
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(4 votes)
Answer
- Tejas
  Posted 9 years ago. Direct link to Tejas's post “You are correct that that...”
  You are correct that that is how the book value of the stock will react. However, for most acquisitions, the market value of A will continue to go up, because A will now be better able to make a profit.
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  (3 votes)
harry park
Posted 9 years ago. Direct link to harry park's post “What does it mean when Sa...”
What does it mean when Sal says, Company A is paying a premium to Company B?
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(2 votes)
Answer
- Andrew M
  Posted 9 years ago. Direct link to Andrew M's post “A is paying B more than t...”
  A is paying B more than the price of B's stock was trading at before A came along wanting to buy it. That's a premium.
  Comment on Andrew M's post “A is paying B more than t...”
  (5 votes)
Matthew Dai
Posted 11 years ago. Direct link to Matthew Dai's post “At 1:02, how do you issue...”
At
1:02
, how do you issue shares? Do you just make a public annoucement that you're introducing more shares into the market, or is there a bunch of legal processes you have to go through in order to issue shares?
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(3 votes)
Answer
jaysonbeech.5679
Posted 8 years ago. Direct link to jaysonbeech.5679's post “So, where exactly are all...”
So, where exactly are all of these discussions happening and how can people be updated on these sorts of transactions happening? I've looked over the SEC's website and I found it a little overwhelming. Is it really just getting set up for updates on Yahoo and keeping a really close eye on what is happening in business? If that is so, how does someone conduct the right research on companies so that we might be able to become educated on the market so that we can make educated guesses on what is going to happen in the market?
Button navigates to signup pageButton navigates to signup page
(2 votes)
Answer
- Andrew M
  Posted 8 years ago. Direct link to Andrew M's post “You will never, ever, eve...”
  You will never, ever, ever know as much as the professional investors do, so don't play a fool's game. If you want to invest in stocks, buy a diversified low-cost index fund.
  Button navigates to signup page
  (2 votes)
Andrew Cass
Posted 7 years ago. Direct link to Andrew Cass's post “Does company b and a stil...”
Does company b and a still both remain? does the stock of 'both' a & b both go up? If a company gives it shares to buy out another company does the stock drop once the other company cashes out? im just curious how is it profitable for A to buy B if b only uses the shares given to cash out? Wouldnt that make A have less then before?
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(1 vote)
Answer
- Tejas
  Posted 7 years ago. Direct link to Tejas's post “After the acquisition, co...”
  After the acquisition, company B no longer exists. It becomes part of company A. There will be no more B shares, since they will all be owned by company A. The reason that this might be profitable, despite A paying above market, is that both companies together might be worth more than the sum of the companies separate.
  Comment on Tejas's post “After the acquisition, co...”
  (1 vote)
harry park
Posted 9 years ago. Direct link to harry park's post “So the reason why B's sto...”
So the reason why B's stock price increase after the acquisition is announced is because Company A paid a premium to Company B?
I still don't understand why that would increase the stock price of Company B.
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(1 vote)
Answer
- Andrew M
  Posted 9 years ago. Direct link to Andrew M's post “Company A has to buy the ...”
  Company A has to buy the shares of B from shareholders of B. Yesterday shareholders of B did not know A was interested in buying up all the shares. Today they do. Doesn't it make sense that sellers of B will now want a higher price than they did yesterday, knowing that Company A wants to buy every single share? Company A is going to have to pay a premium over the pre-announcement price. As soon as people realize that premium is coming, they are not going to sell their shares for much less than that, so the stock price moves up right away to near the expected price that A will pay.
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  (1 vote)
Jos
Posted 9 years ago. Direct link to Jos's post “Shouldn't the price of th...”
Shouldn't the price of the shares of company A drop (a little) because everybody knows that the transaction only happens when A pays a premium for the shares of B? This means that some value get's lost for shareholders of company A.
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(1 vote)
Answer
- antti.myllykoski
  Posted 9 years ago. Direct link to antti.myllykoski's post “I think you are correct i...”
  I think you are correct in this. If company B's assets are still valued at 50M after the acquisition (so assuming no synergies) then the total market value of company A's assets would now be 400M + 50M = 450M. Taking out the 100M in liabilities leaves a market cap of 350M which is distributed to the now 12 million shares of A's stock giving a price of 29,1666 for A. And hence B would be trading at 58,3333 rather than full 60. So in effect the value of the B stock would increase but the value of A stock would decrease because of the premium.
  Button navigates to signup page
  (1 vote)

Video transcript

Male: We finished the last video with the scenario where company A wants to buy company B, but they're not going to do it with cash, they're going to do it with their shares. They issue a press release saying that company A intends to acquire company B for $60 million in A's shares. They want to give a price that's a premium to company B's current market cap so that it's compelling, so that the shareholders of company B want to do this. They're like, wow, that's a 20% premium to our current market cap, so we're willing to do it. Since this is a share transaction, company B shareholders won't exactly get $60 million. What's going to happen is company A's going to issue 2 million in new shares. Those 2 million new shares, in theory, could be worth $30 a share. Maybe they could sell them in the open market at $30 a share so that they would be worth $60 million. Instead of trying to raise the cash and then giving the cash to company B, they're just going to take those shares directly and exchange them for all of the shares of company B, essentially acquiring the company with all of those shares. Every shareholder of company B, for every share they have, they'll get 2 shares of company A. If at the time of closing, company A's stock price goes from $30 to $35 a share, then the transaction price would, if you think about the market value of those shares that company B's shareholders are going to get, the market price would actually be $70 million. If the market price of company A goes down to $25 a share, then they're only going to get $50 million worth of shares. What I want to think about in this situation is what should happen to company B's stock before the transaction closes, if we assume that everyone thinks the transaction is going to happen? Let me draw a stock chart here. This is price. This is time right over here. Let me draw company B's stock price first. Let's say right now it is trading at $50 a share. That is company B. Right now company A's trading at $30 a share. Notice even though that their share price is lower than company B's share price, they have a much larger market cap because they have many, many more shares. They actually are a larger company so it doesn't sound crazy for them to acquire company B. Now, this is the day that everything was announced. Let's just assume that everyone thinks the transaction will happen. For every share of B a B shareholder has, they will get 2 shares of company A. If company A does this, what should happen to company B's stock price if everyone is 100% sure the transaction's going to happen? Every share of B is going to be converted into 2 shares of A. After this point in time, if you're sure the transaction's going to happen, each of these B shares should be worth 2 A shares, so they should trade exactly at twice the value of the A shares. Right when the transaction was announced, if everyone assumes it's going to occur, B shares should immediately jump up to $60 a share, and then they should always trade at double of A's shares. If they trade at less than double of A's shares, then, instead of buying A shares, people would rather buy B shares, or they could buy half of B shares. Or let's say there was someone who was going to buy 2 of A shares, instead they'll say, "Hey, look, B shares are trading for less than "2 of A shares, but they're going to be worth "2 of A shares in the future because of this merger, "so I'm just going to buy B shares instead." There's no reason, if everyone assumes the transaction's happening, that before the transaction closes that B shouldn't trade at exactly twice the stock price of A.