Hi Guys,
Question …
Company A (acquirer) has a stock price of 110 and a EPS of 5 with PE of 22…
Compnay B(Target) has PE of 18…(.Data pre merger…)…
Hence in order for the EPS of Co A to rise post merger ,Co A PE >Co B PE …
If the mkt was efficient ,Co A stock price would remain at 110 and not at 5.37*22=118.7…but it would actually adjust PE to 110/5.37=20.5…
Hence post merger the PE falls from 22 to 20.5…
But in inefficient mkt PE remains the same at 22 and they adjust the price to 118.7…
Please guys throw some light …Why the MKT price remains the same in Efficient mkts…
Thankss