Assume that Healthcare Associates was fairly valued before the acquisition. Amer

Question

Assume that Healthcare Associates was fairly valued before the acquisition. American Health Products had 100 million shares outstanding at $22.83 per share, before the acquisition. If American Health Products paid a premium (over the market price) of $800 million for Healthcare Associates, what would you expect will happen to American Health Product’s stock price on the announcement?

a. Increase because of the expected synergy benefits

b. Decrease because the AHP overpaid for HA

c. Increase because AHP pays less than they gain from synergy benefits d. Not enough information

Explanation / Answer

American Health Products overpaid for acquisition

Companies generally pay more price of they expect the synergies but if the overprice is less that expected synergies then the deal will not be considered good and stock price will fall

But if expected value of synergy is more that the overprice then deal will be considered as good and stock price will increase

In this case we know the amount of overprice paid by American Health Products but we did not know the expected synergy benefits. So we do not have enough information to predict how market will react.

Therefore teh answe would be option 'd' i.e. not enough information

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