Reactions to an acquisition drive stocks’ prices

Motley Fool

Q: When a company buys another company, does the acquiree's stock price always go up? — H.W., Salisbury, Maryland

A: It depends on the deal. If the acquiree's prepurchase market value is around $4 billion (let's say that amounts to a $40 share price), and it's purchased for $5 billion (or $50 per share), the stock price will probably jump at the news, typically to around the purchase price per share (in this case, $50).

Companies are often bought at premiums to their market value, especially when they have desirable technology, patents, growth prospects and so on. In such cases, the acquirer might have to outbid other interested parties. It's different for struggling companies; they might be bought for relatively little when their stock prices are depressed.

Meanwhile, if investors are bullish about the acquisition, the acquiring company's own price also might rise. But if many believe that it overpaid or that it won't see a good return on its investment, its price can fall. It all depends on investor expectations and reactions to the deal. Some acquisitions turn out to be brilliant moves, while others are regretted.

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Name that company

I trace my roots to a construction company founded in 1912 in Santa Ana, California. Over the years, I built gas plants, compressor stations, missile silos, oil refineries, offshore drilling rigs, highways, bridges and more. I helped build the Trans-Alaska pipeline, too. Today, based in Irving, Texas, I'm a global engineering, construction and maintenance giant, employing more than 56,000 people and raking in more than $19 billion annually. I've been one of Fortune magazine's "World's Most Admired Companies" for 18 years in a row and a "World's Most Ethical Company" (per the Ethisphere Institute) for 12 years. Who am I?

Last week’s answer

I trace my roots to 1965, when I was founded as a mail-order veterinary supply company in San Diego. I debuted my first store in 1980, in Oregon, and expanded over the following years, acquiring related companies and opening stores. I went public for the first time in 1994, and I launched my website in 2001. Today a privately held company again, I operate more than 1,500 stores across the United States (including Puerto Rico) and Mexico. I help find homes for more than 400,000 animals each year. Who am I? (Answer: Petco).