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Acquiring a company comes with a cost, which is called a premium. The acquiring company pays the premium for the work that built the company from scratch. The stock prices of the acquired/target company tend to rise as they receive a premium from the acquiring company.
Example of a Stock-for-Stock Merger For example, Company A and Company E form an agreement to undergo a 1-for-2 stock merger. Company E's shareholders will receive one share of Company A for every two shares they currently own in the process.
After an acquisition is announced, the stock price of the company being acquired typically rises to a level close to the agreed-upon purchase price. Since further upside potential can be quite limited, it may be wise to lock in your gains shortly after the acquisition announcement.
How do stocks work with mergers? Depending on the specifics of the merger, investors may have their shares cashed-out, or exchanged for shares of the new company. Prices of stocks may increase or decrease, often depending on if they're shares of the target or acquiring company.
After The Company Is Acquired For A High Premium When a company announces a merger or acquisition, it's time to move fast. Stock prices typically spike when a company is being bought out for a premium. It's a great time to sell your stocks and lock in your profits.