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i don't know shit about stocks- can someone explain why AT&T stock dropped 5% and Time Warner increased 12.5% off the news?

charlesdm 10y ago
The acquirer (AT&T) is going to pay a boatload of $$ to acquire Time Warner. Time Warner shareholders are getting a payday, whereas AT&T shareholders will be spending money.
- catshirt 10y ago
  ok but, doesn't it ideally increase AT&T's value over time (else why would they be acquiring)? meaning, if the acquisition goes as planned, wouldn't you be better off holding onto AT&T?
  - charlesdm 10y ago
    Yes, over time. Not today. There are a lot of unknowns, because every deal usually starts from an idea, e.g. we're going to acquire X for $10bn, and that will give us $1bn in extra profits + $2bn in synergies after integration. But they need to integrate the company first to achieve those results, meaning it's unknown, meaning it can fail, meaning there's a risk premium. Half of what determines the price of a stock on the stock market is psychology. It's a herd.
    - catshirt 10y ago
      thanks! my rudimentary understanding was pretty much correct... it sounds, then, like shareholders simply don't have faith in the acquisition?
      - charlesdm 10y ago
        It depends. If AT&T spends a lot of cash today, the intrinsic value of a single share goes down, because there is less cash to return to that shareholder tomorrow. However, if it looks like the integration is going well, the price will increase, since indeed the company will be more valuable. In the event of a deal, Time Warner shareholders are getting a cash premium SOON. So the price goes up.
clfougner 10y ago
Basically, because AT&T is paying more for Time Warner than the market had valued it at. As an example: Company A has 50 billion dollars cash on hand, and their core business is valued by the market at 100 billion, so their market cap is 150 billion. Company B's core business is valued by the market at 25 billion and has no cash on hand, so their market cap is 25 billion. Company A then purchases company B's core business for 50 billion dollars. Company A then has no cash on hand, their original 100 billion core business, and a new business that the market valued at 25 billion, so their new market cap is 125 billion (a 16.6% decrease). Company B (or their stockholders, strictly speaking) on the other hand has 50 billion dollars in cash, and no core business, so company B now has a "market cap" of 50 billion dollars (100% increase). More often than not, the market (i.e. those buying and selling the stocks) will assume that the company being acquired was correctly priced before the purchase and that the acquiring company overpaid.

charlesdm 10y ago

The acquirer (AT&T) is going to pay a boatload of $$ to acquire Time Warner. Time Warner shareholders are getting a payday, whereas AT&T shareholders will be spending money.

catshirt 10y ago
ok but, doesn't it ideally increase AT&T's value over time (else why would they be acquiring)? meaning, if the acquisition goes as planned, wouldn't you be better off holding onto AT&T?
- charlesdm 10y ago
  Yes, over time. Not today. There are a lot of unknowns, because every deal usually starts from an idea, e.g. we're going to acquire X for $10bn, and that will give us $1bn in extra profits + $2bn in synergies after integration. But they need to integrate the company first to achieve those results, meaning it's unknown, meaning it can fail, meaning there's a risk premium. Half of what determines the price of a stock on the stock market is psychology. It's a herd.
  - catshirt 10y ago
    thanks! my rudimentary understanding was pretty much correct... it sounds, then, like shareholders simply don't have faith in the acquisition?
    - charlesdm 10y ago
      It depends. If AT&T spends a lot of cash today, the intrinsic value of a single share goes down, because there is less cash to return to that shareholder tomorrow. However, if it looks like the integration is going well, the price will increase, since indeed the company will be more valuable. In the event of a deal, Time Warner shareholders are getting a cash premium SOON. So the price goes up.

clfougner 10y ago

Basically, because AT&T is paying more for Time Warner than the market had valued it at. As an example: Company A has 50 billion dollars cash on hand, and their core business is valued by the market at 100 billion, so their market cap is 150 billion. Company B's core business is valued by the market at 25 billion and has no cash on hand, so their market cap is 25 billion. Company A then purchases company B's core business for 50 billion dollars. Company A then has no cash on hand, their original 100 billion core business, and a new business that the market valued at 25 billion, so their new market cap is 125 billion (a 16.6% decrease). Company B (or their stockholders, strictly speaking) on the other hand has 50 billion dollars in cash, and no core business, so company B now has a "market cap" of 50 billion dollars (100% increase). More often than not, the market (i.e. those buying and selling the stocks) will assume that the company being acquired was correctly priced before the purchase and that the acquiring company overpaid.