US Air announced that it will acquire American Airlines today in an all stock deal valued at $11 billion. Shares of USAIR dropped $0.67 to close at $13.99, a 4.6% drop in value. Shares of American Airlines rose $0.82 to close at $2.12 a 63% rise in value! We've noted before that (ignoring the effects of anticipation) bidders tend to break even or report small losses upon the announcement of a deal for a public company. This is especially true when stock is involved. The prevailing logic on the drop in value when stock is issued involves a signaling effect: "Hmmm, they offered stock. Guess they wouldn't have done that if they thought it was undervalued."
In contrast, shareholders of target firms typically earn 20 - 40%. The results of this deal are loosely consistent with those statistics. One can argue, however that although the dramatic rise for American Airlines and the sharp loss for US Air are surprising, since the deal was widely expected to happen. The price changes may reflect surprise not in the deal itself, but in the particular terms of the offer. Certainly, shareholders of American Airlines, a company in bankruptcy must be esctatic. (See, for example, AMR shareholders to receive rare value from Chapter 11.)
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Next week we'll talk about a dramatic rise in merger related litigation and also begin exploring motives for mergers. I think there is a good probability that we may have a bit more to say about the Dell LBO as well!
All the best,
Ralph
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