Corporate Finance- Mergers and Acquisition

CFA Level II Corporate Finance
#1

When Whelan presents Zenith’s proposed takeover to the board of directors the following day,
one of the directors made the following statements:

Which is one the most accurate?

  1. Although I am certainly in favor of this takeover, I think we would achieve the greatest
    value from the acquisition if we offered more stock and less cash.

  2. If Zenith does not realize the potential synergies of this acquisition in the next five years,
    I suggest a “spin-off” as a means to recover some of the money lost in this venture.

  3. A positive initial market reaction will confirm that we did not overpay for Zenith.

Why is it 3 and not 2?

#2

Spin-off does not result in Zenith receiving cash. Shareholders of Zenith will receive shares in the spin off proportional to their current shareholdings

#3

ok, so why is it 3? whats the explanation behind that

#4

Initial market reaction is is a gauge of the value investors place on the gains from the M&A and the indication of future returns.

If the acquirer’s stock price falls when the deal is announced, it is a signal by investors that they think the merger benefits are doubtful or that the acquirer is paying too much.

#5

is that the reason why usually at merger and acquisition announcement that the Acquirer’s stock price goes down and the targets price goes up?