Share Price Dynamics in M&A Deals

[@nl9320]

Hello, Brian. Regarding your question at the end of the video: the target's price should be close to price of the deal, just like in your example. The way of financing shouldn't matter. It all comes down to investors' sentiment and their vision of the deal. I can only assume that if deal is financed with stock issuance, it creates a dilution that may not satisfy existing investors of the buyer's company. Please, correct me if I'm wrong

[@financialmodeling]

You are partially correct in that the target's price will move closer to the offer price, but the question here is about the buyer. The buyer's price will also change based on the perceived value of the combined entity, but in a 100% Cash or Debt deal, the buyer does not issue any stock, so the share count stays the same... so the share price might change in a different way than in a 100% Stock deal.

[@QzarVideos]

Does the type of stock issues play any role in the share price of the buyer? I.e., would partial loss of ownership of current shareholders be reflected in the share price? Thanks for the video!

[@financialmodeling]

+Adid Potentially, yes, but it would be really tough to predict something like that in advance. So generally the buyer's stock price will still trend with the market's perceived value of the combined entity.

[@yungchiehcheng6974]

Hi Brian, Just wanna check if I get this right. So considering a non-stock issuing deal (Use either cash or debt or both), what happens will be that the shares outstanding will stay the same as what it was the buyers had. Also, the combined equity value is not affected by how the company funds the deal, but by what premiums they are willing to pay and the market sentiments. But the market sentiment is now affected by their thoughts on the tradeoff between the after-tax foregone interest on Cash/incremental interest on debt, and the diluted effect by issuing stock. I am not sure if this is the right angle to see this problem, Could you give me some hints?

[@financialmodeling]

In all-cash and all-debt deals, the Combined Equity Value = Buyer's Equity Value because no new shares are issued at all. It might decline after the deal is announced if the market doesn't like the price, company, or other deal terms, though, so that is only what happens immediately at announcement. I'm not sure I understand your second question. If the buyer's share price changes significantly, it's usually because the market thinks the buyer is significantly overpaying or underpaying for the target. Share price changes are also more common in all-stock or majority-stock deals.

[@weloct2422]

With a 100% cash or 100% debt financing, the combined equity price remains the same as the acquirer's existing equity value, and the number of shares does not change (no new share needs to be issued), hence, by theory, the price should remain the same or might change with the shifted sentiments. However, here, the sentiment would tend to shift more towards an increased price than to a decreased price. Explanation - 100% cash or debt financing would allow a higher potential for an accretive deal as compared to a 100% stock financing deal as the combined EPS will be more for 100% cash or debt financing than it would be for 100% stock financing. This means P/E should adjust lower for cash or debt financing for eliminating any added impact on price. In general, we hardly see the P/E ratio to adjust to a lower multiple. Rather, P/E remains the same impact is shown more on the price. Thus, for an added accretive deal, the most likely would price the share higher than it would do for a 100% stock financing. Pardon for such a long explanation, and I would request you to correct me if I go wrong in explaining.

[@financialmodeling]

I'm not really sure what you're asking. Are you just summarizing this video? If so, yes, I think you understand the main points. But I don't understand this part at all: "In general, we hardly see the P/E ratio to adjust to a lower multiple. Rather, P/E remains the same impact is shown more on the price. Thus, for an added accretive deal, the most likely would price the share higher than it would do for a 100% stock financing. "

[@Austin-wh4yi]

if the buyer is paying with, say 95% stock, would the math to calculate shares issued in deal simply be (95%*350)/10?

[@financialmodeling]

Yes

[@yoelherman5344]

In the Facebook/Whatssapp deal, it means that toward the closing of the deal, the market thought the deal price was ok?

[@financialmodeling]

WhatsApp was so much smaller that it was barely relevant there. But yes, maybe.

[@VinhNguyen-ef8fz]

Hello, could I have a copy of your excel spreadsheet please?

[@financialmodeling]

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