Does the acquirer’s share price remain the same post-merger? Does this happen in both cases of paying in cash and paying in shares?
My question came up due to the following question and its answer:
QUESTION:
Yellow Inc has just announced that it will acquire Green Inc using a securities offering.
The exchange ratio is 0.9.
Green Inc has 2 million shares outstanding.
On the day of the merger, the share price of Green Inc is $18.00, the share price of Yellow Inc is $23.00.
Fiona Jones is a shareholder in Green Inc, who prior to the acquisition, held 8,500 Green Inc shares. What would be the value of her holding immediately after the acquisition?
ANSWER:
After the acquisition Fiona would hold 0.9 x 8,500 = 7,650 shares
The value of 7,650 shares of Yellow Inc shares is: 7,650 x $23 = $175,950