Is there a difference between selling right before a merger and selling right after a merger?
Suppose company A and B are going to merge, and the merger is guaranteed to take place very soon. In the merger deal, shareholders of A get shares in the combined company, and some cash. Suppose I own shares in company A, but I want to sell those shares. Is there going to be any difference between selling now and selling right after the merger?
My intuition says that there should be no difference at all. Assuming that the market is efficient, the market has already priced-in the the effects of the merger, so there is no difference between selling right before the merger and right after the merger. Is my thinking correct?
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A merger is not guaranteed to take place until the papers are signed. Until that date, when it's a cash offer, the share price of company A will trade in the vicinity of the merger price. Sometimes, on the day of the announcement, it will briefly trade above the acquisition price. The usual pattern is that it's reasonably close but lower than the merger price. In some instances, it trades above the merger price because some believe the possibility of a higher acquisition offer from a 3rd party.
In your example, it's a cash and stock offer from company B. In the interim, the price of company B can fluctuate and that directly affects the value of what you received from the terms of the merger. That is a future unknown so selling now or later can have very different results,
And note that until the contracts are inked, all you have is an appreciated paper gain. It's not unheard of for companies to decide not to acquire or be acquired by another company.
It depends on your guess on how the market is going to react.
You say the merger is guaranteed to take place. I will take you at your word. But the market can think it is a good idea or a bad idea to merge at that price. Therefore the question now that merger is guaranteed to take place is: Will the market decide to jump in or jump out before the merger date. Then you have to decide which action will get you the most money.
Keep in mind there can be a delay of a few days where you are prevented from selling. What will happen during that time?
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