Which of the following is true about mergers?

Question

BlackTom AI · Accepted Answer

Target shareholders typically capture the bulk of announcement gains because acquirers must pay a premium to secure control. Empirical corporate finance and market-efficiency theory explain why announcement-day abnormal returns concentrate in the target’s stock.

Relevant concepts:
- Announcement effect: stock prices adjust immediately when new information (a merger offer) arrives.
- Premium: acquirers offer above the pre-announcement market price to induce target shareholders to sell.
- Wealth allocation: the premium transfers value to target shareholders; any synergy-related gains are shared but the immediate jump is concentrated in the target.

Step-by-step reasoning with a simple numerical example:
1. Suppose Target’s pre-announcement market price implies market cap = $100 (per-share price = $10). Bidder’s market cap = $1,000.
2. Bidder announces a cash offer of $14 per share for Target (a 40% premium). Target shareholders see their per-share value jump from $10 to $14, an abnormal return of +40% (gain = $4 per share).
3. The market revalues the bidder: it must pay $14×(number of target shares). If the market expects total synergies of $2 (per target share), the combined value increases by $2 per target share, but since the bidder paid a $4 premium, bidders may experience a small negative abnormal return (reflecting overpayment and integration risk).
4. Total announced wealth effect = premium transferred to target + present value of anticipated synergies. Most of the observable immediate increase appears in target stock because the premium is paid directly to target holders.

Why the correct answer is correct:
- Empirical studies consistently find large positive abnormal returns for targets (often tens of percent) and small or slightly negative returns for bidders. The premium mechanism explains the concentration of gains in targets.

Why other plausible alternatives are incorrect:
- “Gains accumulate mainly in bidders” is wrong because bidders pay the premium, reducing their short-term gains.
- “Gains are split equally” is incorrect because the premium skews the immediate transfer to targets and bidder gains depend on realized synergies and financing.

Conclusion: The correct statement—Merger announcement gains accumulate most in the target—matches the provided answer.

Which of the following is true about mergers?单项选择题

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