Stock question

[34saving]

Hi everybody! I'm really inexperienced when it comes to the stock market, and I have a question that I'm hoping somebody with a bit more experience can answer. I bought stock in one company (most of my equities are in mutual funds, but . . .) I'll call it company A. My company recently got a reasonably firm deal to aquire company B. They offered the stockholders of company B .1 shares of company A stock and 8 cents a share. At current levels that means that each share of company B stock should be worth $.41 after the merger goes through. Here's the part that seems strange to me: Company B is trading for $.32. Company A is giddy about the deal and I can't believe company B would back out unless they got a better deal. So, why is company B still trading it $.32? It seems a no-brainer to invest in company B, but Wall Street isn't supposed to have no-brainers . . . . Any ideas? Thanks!

[terry1156]

I'm not sure I understand completely, but this might be the situation. Company A shares are getting Company B stock + 8 cents. The 8 cents are a premium that comapny B is paying (which companies often do when purchasing a company they want). So the company B shares are worth the 32/33 cents. In this case, you want the company A shares because they are paying an 8 cent premium.

[34saving]

Terry -- thanks so much for responding! I'm really trying to get this one figured out. Your solution would make sense to me too, but it's the other way around. Company B is getting company A stock and cash. Company B will be going away -- absorbed into company A. Company A is paying a premium for company B, but B's shares aren't reflecting that. I guess if I have faith that company A will really go through with the deal I should buy company B and be happy about the 25% return? (Not with Baby's milk money of course. ) What do you guys think? Does anybody invest in individual small (or micro) cap stocks?

[baselle]

I guess I'm trying to figure this one out too. Company A's management has valued Company B and decided that B's underlying worth (which could be more than money - it could be skills, or B could inhabit a business niche that is desirable to A) reflects that stock valuation. FYI - learn everything you can about the deal, the hitches, the timing. It might well be that the deal will only go through if A's shareholders vote for it.

Now B might be worth that or it might not be. B's current share price depends on how the rest of the stock market values the company - and this could certainly be different than Co A. Markets are not "efficient", pricing everything perfectly. Co A could see something in B that the rest of the market didn't. If Co A is right, Co A makes a lot of money. Situations like this - where the market undervalues a stock - are so common that that style of stock picking has a name - value trading. Its made Warren Buffett and Peter Lynch very rich men.

Small or micro cap stocks may or may not be a good deal. It is a great place for a value trader because a lot of stock analysts don't follow small stocks. There are pitfalls - if there aren't a lot of shares floating around or the price is really cheap, its easy for people who bought some to talk up the price of the stock, then sell (the scam is called pump and dump). What you really, really want look at is the stock price - you should avoid ones that are under 5-10$ a share. If a stock is dirt cheap, how good is the underlying company really?

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Baselle -- Thanks for the added insight! Here are some more details as I see it: Company A wants company B mostly for the carryover tax deductions and credits. Company B also has some of the same customers as A. Company B also has a niche that would compliment A well. However, I guess the tax stuff alone makes B worth about $4 a share to A and since they're only paying about 41 cents (and most of that is in diluted stock instead of cash) . . . Both companies have most of their revenues going to pay employees and there is talk that combining work forces will also lead to greater profitability. B's stock is largely worthless and I wouldn't even think about investing in B except that I think A will aquire it and will aquire it at a rate that leads to a 25% profit if I bought now. B could be subject to a pump and dump but nobody seems to be pumping. I don't think A could be subject to a pump and dump even though it's trading in the 3. something range because 1) Its volume is about 1/2 million shares a day. 2) It over 70% owned by institutions. . . .and, again, nobody seems to be pumping. Maybe I've found a market ineffiiency? Maybe I'm just dilusional? (BTW, I haven't used real names to avoid any appearance that I'm trying to pump and dump -- not that this board would fall for that kind of thing anyway! )