M&A Share prices

Big Four - Strategy M&A Case
New answer on Jan 09, 2021
4 Answers
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kari asked on Jan 03, 2021
EY-Parthenon Strategy & M&A professional

Dear All ,

Request if someone can help with my below query :

what happens in M&A is target company is publicly traded but acquiring company is not . What will happen to the shares and their price . Also how do we calculate the share price of the new entity (I am assuming the original share price will not hold any more ) .

Please help . Thank You

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Francesco
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replied on Jan 04, 2021
#1 Coach for Sessions (4.000+) | 1.500+ 5-Star Reviews | Proven Success (➡ InterviewOffers.com) | Ex BCG | 9Y+ Coaching

Hi Kari,

I replied below.

1. What will happen to the shares and their price .

If you mean the price of the target: normally acquisitions are done at a premium compared to the market rate to take into account the value of synergies for the buyer

2. Also how do we calculate the share price of the new entity (I am assuming the original share price will not hold any more ) .

You can perform a valuation of the new entity (via DCF or multiples) and divide the value by the number of shares of the new entity

Hope this helps,
Francesco

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kari on Jan 04, 2021

Thank you Francesco !

Ian
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replied on Jan 04, 2021
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Hi Kari,

If a private company is buying a public company, they are almost certainly taking them private. If they are not, and just want a controlling stake, they need >50% of the shares.

In both scenarios, the purchasing company will never have a share price.

In terms of the acquired company, the acquisition cost will be [# shares] X [price per share] X [some % factor higher]. This is because the share price represents the most recent trade but not all trades require to get the desired # of shares.

If you've studied economics, you'll know that there is a supply/demand curve. As such, any additional purchase of shares will have to be made at a higher price than the current market rate. The case should guide you on this, but it could be anywhere from 10-50% higher than the market rate (on average).

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kari on Jan 04, 2021

Understood , Thank you Ian !

Clara
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replied on Jan 04, 2021
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

It´s very difficult to talk in general terms.

However, the deal price -that is negotiated each time- can be formed in many different ways (e.g., EBIDTA muldtiple per a multiple + synergies multiplied for another multiple)

In any case, don´t worry, since this is not in the scope of an M&A MBB case.

Best regards,

Clara

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Anonymous replied on Jan 09, 2021

Hi,

Once the acquisition made public, the share price of the target usually will increase as market react to the news. The purchase price will usually a premium compared to market price.

For your second questions, Francesco already provide the correct approach.

Best,
Iman

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Francesco

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