✏️ Merger Announcement Example in Excel
✏️ Suppose you offered an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 30% premium to buy TargetCo. Immediately after the announcement the target price will change significantly. Simplifying assumptions: Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover. Ignore time value of money.
| Target | Acquirer | |
|---|---|---|
| PreAnnounce #SO | 10M | 50M |
| PreAnnounce EPS | $1 | $2 |
| PreAnnounce Price | $40 | $50 |
What are the following:
- Exchange ratio?
- Share price of the combined company → $48.01?
- Share price of the acquirer and target right after the announcement?
- Forward looking.
- How did the shareholders of both companies do? Are the better or worse off?
↑ we can see that the 30% premium was a fiction. It was only used to calculate the exchange ratio. However, because markets are forward looking, the share prices adjusted very rapidly after the announcement to recognize the effects of the merger and the way that the target was being overpaid and the acquirer was overpaying (and hence being diluted)
How is it that the premium you are willing to pay and what you actually pay is different (in a nutshell)?