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The acquisition values Level 3 at $66.50 a share, the companies said in a statement Monday. That’s about 42 percent above where the Broomfield, Colorado-based c

The acquisition values Level 3 at $66.50 a share, the companies said in a statement Monday. That’s about 42 percent above where the Broomfield, Colorado-based company was trading last week, before reports surfaced of a potential acquisition by CenturyLink... What explains this? I could understand a small jump in value, but what can be the basis for a $14B gain in a company's value when the only facts that have changed are that a buyer exists? Does the market "believe" that the company's future 42% brighter under the prospect of a buyout, and that belief is captured in the price now?

JustSomeNobody 10y ago
I've often wondered this as well. Would love an eli5...
jacques_chester 10y ago
My understanding, which should not be relied on, is that the market is composed of traders expecting other traders to bid it up in anticipation of CenturyLink bidding it up, so they're bidding it up.
- pandemicsyn 10y ago
  Or that another suitor will step in and cause an intense bidding war ala Isilon/Data Domain/etc.
biehl 10y ago
The difference in value should be the "synergies" that combining the companies will yield.
- lbradstreet 10y ago
  Especially this financial magic "The deal also promises to help CenturyLink by giving it access to about $10 billion in tax credits that Level 3 is carrying on its books"
dsacco 10y ago
The most straightforward reason why the stock price jumps is because the acquirer generally makes a bid at a premium to the potential acquiree's stock value in order for the deal to make sense. Market participants know this, especially professional traders, so when the news comes out the fastest players will hop on the stock to make a quick profit. Those who get in on it the fastest when the news breaks enjoy an increase of several percent (or sometimes significantly higher, such as in Linkedin's case!). The long term reasons and implications are more complex, but from a short term game theoretic perspective if you can quickly act on the knowledge of an acquisition, you can make quite a bit of money. Most people don't have the savvy or infrastructure in place to do this, but if you're drinking coffee in the morning and you see this pop up on your Bloomberg terminal, you'll want to buy within seconds/minutes if you believe the stock is going to jump. You can go so far as to automate the process and place orders for the stock as soon as an algorithm recognizes an acquisition announcement. There is also the phenomenon where you can reasonably assume that M&A announcements were leaked in hindsight by looking at the option trading history for the stock. Very often you see that in the week or days prior to an announcement, extraordinarily lucky "bets" are placed in the form of call options, indicating that someone knew and acted on the information. Matt Levine has a great Bloomsberg column article on this with several examples.
icebraining 10y ago
The 42% increase was CenturyLink's offer over last week's stock price. The actual stock price is only at $54 (15% above last week). Why would CenturyLink offer such a large premium? Beats me, I'm not an expert.
JumpCrisscross 10y ago
Two things: 1. CONTROL PREMIUM. Buyers pay more to control a company [1]. Control means you can directly effect changes through management. (The flip side is the minority discount.) There is also the technical aspect of, when buying 100% of a company, needing to make an offer 70% or 90% or whatever (depending on the target's bylaws) of the company's stock will accept. The most willing sellers are reflected in the bid-ask. Less-willing sellers will need more to move. Since you make one bid to everyone, a premium emerges as the price the last least-willing seller you need will accept. 2. SYNERGIES. If you have a billing department and they have a billing department, you can probably do fine with just one billing department. The more similar the acquirer and target, the more of these cost savings and joint growth potentials (e.g. targeted ads over TV) emerge. [1] https://en.m.wikipedia.org/wiki/Control_premium https://en.m.wikipedia.org/wiki/Control_premium
hueving 10y ago
Keep in mind that the offer has to be good enough to get the majority of stock holders to sell. The long term holders of the stock obviously believe the company will be worth more than its current trading value (otherwise they would have sold). So a buyer has to pick a value that convinces enough of these shareholders to cash out. Imagine that you owned a condo in a building and each owner got to vote on whether to sell the whole building. If a buyer wanted to buy the whole building, they are going to have to make an offer with an amount per condo higher than any of the current listings to capture a majority of the condo owners' interest that weren't previously interested in selling.
bboreham 10y ago
Consider "where xyz was trading last week". This is the price at which deals got done - at which both the buyer and seller thought they were getting a "good enough" deal. On that day, there are many people holding the stock who do not sell, because they believe the correct price should be higher. And there are many people who might buy, but do not because they think the price is too high. For an acquisition you have to pay the price where most of the holders _will_ sell. This price is naturally higher than the price where some holders _did_ sell, on a given day.
wlievens 10y ago
The ARM acquisition had a similar premium of around 40%. If you picture buying all those shares one trade at a time though you can easily imaginr the price pressure pushing it 20 or 30 pct higher. The rest is synergy or whatever you want to call it.

JustSomeNobody 10y ago

I've often wondered this as well. Would love an eli5...

jacques_chester 10y ago

My understanding, which should not be relied on, is that the market is composed of traders expecting other traders to bid it up in anticipation of CenturyLink bidding it up, so they're bidding it up.

pandemicsyn 10y ago
Or that another suitor will step in and cause an intense bidding war ala Isilon/Data Domain/etc.

biehl 10y ago

The difference in value should be the "synergies" that combining the companies will yield.

lbradstreet 10y ago
Especially this financial magic "The deal also promises to help CenturyLink by giving it access to about $10 billion in tax credits that Level 3 is carrying on its books"

dsacco 10y ago

The most straightforward reason why the stock price jumps is because the acquirer generally makes a bid at a premium to the potential acquiree's stock value in order for the deal to make sense. Market participants know this, especially professional traders, so when the news comes out the fastest players will hop on the stock to make a quick profit. Those who get in on it the fastest when the news breaks enjoy an increase of several percent (or sometimes significantly higher, such as in Linkedin's case!). The long term reasons and implications are more complex, but from a short term game theoretic perspective if you can quickly act on the knowledge of an acquisition, you can make quite a bit of money. Most people don't have the savvy or infrastructure in place to do this, but if you're drinking coffee in the morning and you see this pop up on your Bloomberg terminal, you'll want to buy within seconds/minutes if you believe the stock is going to jump. You can go so far as to automate the process and place orders for the stock as soon as an algorithm recognizes an acquisition announcement. There is also the phenomenon where you can reasonably assume that M&A announcements were leaked in hindsight by looking at the option trading history for the stock. Very often you see that in the week or days prior to an announcement, extraordinarily lucky "bets" are placed in the form of call options, indicating that someone knew and acted on the information. Matt Levine has a great Bloomsberg column article on this with several examples.

icebraining 10y ago

The 42% increase was CenturyLink's offer over last week's stock price. The actual stock price is only at $54 (15% above last week). Why would CenturyLink offer such a large premium? Beats me, I'm not an expert.

JumpCrisscross 10y ago

Two things: 1. CONTROL PREMIUM. Buyers pay more to control a company [1]. Control means you can directly effect changes through management. (The flip side is the minority discount.) There is also the technical aspect of, when buying 100% of a company, needing to make an offer 70% or 90% or whatever (depending on the target's bylaws) of the company's stock will accept. The most willing sellers are reflected in the bid-ask. Less-willing sellers will need more to move. Since you make one bid to everyone, a premium emerges as the price the last least-willing seller you need will accept. 2. SYNERGIES. If you have a billing department and they have a billing department, you can probably do fine with just one billing department. The more similar the acquirer and target, the more of these cost savings and joint growth potentials (e.g. targeted ads over TV) emerge. [1] https://en.m.wikipedia.org/wiki/Control_premium https://en.m.wikipedia.org/wiki/Control_premium

hueving 10y ago

Keep in mind that the offer has to be good enough to get the majority of stock holders to sell. The long term holders of the stock obviously believe the company will be worth more than its current trading value (otherwise they would have sold). So a buyer has to pick a value that convinces enough of these shareholders to cash out. Imagine that you owned a condo in a building and each owner got to vote on whether to sell the whole building. If a buyer wanted to buy the whole building, they are going to have to make an offer with an amount per condo higher than any of the current listings to capture a majority of the condo owners' interest that weren't previously interested in selling.

bboreham 10y ago

Consider "where xyz was trading last week". This is the price at which deals got done - at which both the buyer and seller thought they were getting a "good enough" deal. On that day, there are many people holding the stock who do not sell, because they believe the correct price should be higher. And there are many people who might buy, but do not because they think the price is too high. For an acquisition you have to pay the price where most of the holders _will_ sell. This price is naturally higher than the price where some holders _did_ sell, on a given day.

wlievens 10y ago

The ARM acquisition had a similar premium of around 40%. If you picture buying all those shares one trade at a time though you can easily imaginr the price pressure pushing it 20 or 30 pct higher. The rest is synergy or whatever you want to call it.