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Why an Acquisition Target Trades Below the Offer Price

Article Quant Q&A · Author: O.K.
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Summary

The document explains why an acquisition target's shares may trade below the announced offer price before a deal closes. In the example, Qualcomm's proposed purchase of NXP was valued at $110 per share, while NXP traded around $98–99. The gap reflects uncertainty about whether the transaction will be completed, including the possibility that regulators will block it on antitrust grounds.

The answer points to required European Union approval and Qualcomm's existing antitrust issues as sources of deal risk. If investors assign a meaningful chance to the acquisition failing, the target's market price can remain below the offer value while the outcome is unresolved. This is a qualitative explanation of merger-arbitrage pricing, not a valuation model: it gives no estimate of completion probability, expected timing, financing risk, or alternative explanations for the observed discount. The quoted price and regulatory circumstances belong to the specific historical example and should not be treated as current deal information.

Key ideas

  • An announced offer price does not guarantee that an acquisition will close.
  • Regulatory approval can create uncertainty that weighs on a target's share price.
  • A target may trade below the offer price when investors assign a nonzero chance to deal failure.
  • The price gap reflects deal uncertainty, but this document does not quantify the probability or other risks.

Tags

EquitiesEvent-drivenArbitrage
Full text
# Share price after acquisition announcement (specifically QCOM NXP)


# Share price after acquisition announcement (specifically QCOM NXP)












Recently it was announced that QCOM plans to acquire NXP in a deal taht values NXP at \$110 per share. In this case I would expect that the shares of NXP should rise up and hit the \$110 mark and stay there until the acquisition formally completes. But NXP shared are around $98-99 --- why?

## Answer by Lliane (score 1)

https://quant.stackexchange.com/a/31159

Qualcomm must get UE authorities approval on anti-trust concerns before proceeding with the acquisition (because NXP is a dutch company) so the deal has a chance not to go through. Qualcomm is already embroiled in an antitrust issue with the UE.

Thus as there is a non-zero probability of the deal not going through, the share is not trading at the tendered price.

https://www.bloomberg.com/news/articles/2016-10-27/qualcomm-must-woo-eu-antitrust-foes-to-win-blessing-for-nxp-bid

http://www.fool.com/investing/2016/11/21/is-qualcomm-trying-to-close-the-nxp-semiconductors.aspx

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.