When rumors of an acquisition surface, why does the stock of the company being acquired go up?I am an amateur investor and noticed that every time a merger rumor surfaces the stock price of the company rumored to be bought out goes up. Currently there are rumors of Palm being bought out and accordingly its stock price rose. What happens to shareholders of PALM if they are bought out by HTC? How do the investors that rushed to buy PALM stock before the merger benefit from the merger? Any accurate information on the topic would be greatly appreciated.
jeff410
When a buyout offer is made for a company, such as Palm, the buyer usually offers a premium over the current market price. This is in order to get shareholders to sell. The offer may also be raised and other potential buyers may make competing offers and drive the price up further. This expected future price draws investors and speculators and drives up the price in anticipation.
dusty_titus
Shareholders of Palm will enjoy the benefits of the "proposed merger" until it happens or until the rumor dissipates, at which time the stock price will go under the previous days quote. Or if the Merger goes ahead, then the stock will rise. It will be many months before a formal arrangement is made between the companies as to how to proceed when one is buying the other. Any investors who rushed to purchase PALM stock in advance of the Merger, may or may not profit from such a movement. The only reason that investors would rush in to purchase stocks in a company that was mentioned for a acquisition or merger, is that other company had decided that they could make a profit from the purchase, in that they could run the company better, or their profits would rise by owning the company.
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