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Background Note
| HBS Case Collection
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2008
(Revised from original 2007 version)
Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk
by
Carliss Y. Baldwin
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Abstract
The announcement of merger or acquisition conveys new information to the capital markets. This note describes how the stock prices of a Buyer and Target behave after the announcement of a deal. First, for an all-stock deal that is certain to go through, the note defines accouchement effects and describes the fundamental arbitrage relationship between Target and Buyer stock prices. It shows how post-announcement prices may be used to infer the market's estimate of synergies. It then explains how the betas of the two companies change post-announcement and the arbitrage relationship between prices in a cash-and-stock deal. Finally, it defines event risk and explains how it affects the prices of the Buyer and the Target.
Keywords: Mergers and Acquisitions;
Announcements;
Capital Markets;
Stocks;
Price;
Risk and Uncertainty;