Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk

Carliss Y. Baldwin

Background Note | HBS Case Collection | December 2007 (Revised January 2008)

Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk

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;

Format: Print

8 pages

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Baldwin, Carliss Y. "Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk." Harvard Business School Background Note 208-103, December 2007. (Revised January 2008.)

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Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk

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