How To Make Money From Mergers And Acquisitions

How to Make Money From Mergers and Acquisitions: Part 1

It doesn’t happen often, but when it does, it’s magical.

You check on your portfolio in the morning, and one of your stocks is up 25%, 40% or 60% – in ONE DAY!

When a stock jumps that much in the opening minutes of trading, 9 times out of 10 it’s because the underlying company is getting acquired. The acquiring company typically pays a premium in order to get shareholders of the other company to go along with the deal.

For example, let’s say Company A is trading at $20. Company B makes an offer to acquire Company A for $28.

It pays $8 more than the current price because, in order to make the deal appealing for shareholders and management, the price needs to be considerably higher than it is today. After all, if the price is just slightly higher, say $21, there will not be much motivation for management and shareholders to sell.

In an average stock market, Company A’s stock would likely climb above $21 within the year – so Company B needs to provide some incentive for everyone to sell. A 40% premium could do the trick.

Shareholders of Company A won’t get the $28 immediately. Usually, the stock of the company getting acquired shoots higher, but not all the way to the offer price. That’s because there is some risk that the deal won’t go through.

That could be because government regulators won’t allow it, shareholders may vote it down or a host of other reasons. So the stock may jump to $27, and as the weeks go by, it might slowly climb up toward $28. If the deal is consummated, shareholders will receive the full $28 per share.

Keep in mind, $28 isn’t automatically the final price. Upon receiving the $28 offer, Company A could say, “Thanks, but no thanks.” When that occurs, Company B usually sweetens the deal, in this case, maybe offering $30.

In this scenario, upon seeing that Company A is for sale, Company C makes an even better offer at $33. Finally, Company B makes one last offer at $34, which is accepted.

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