Why stock price doesn't change after a merger?

CFA Level II Corporate Finance
#1

Hi guys,

Could you please shed some light on why the CFAI material assumes that the share price of the acquirer, which purchases the target for stock, stays the same? Considering the dillution due to the introduction of new shares, market price per share should reflect this dillution.

Thanks

#2

If the acquired company is worth $100 then the combined company is worth $100 more. This is why the share price does not drop in theory. If the market disagrees, the share price will change.

#3

There is a really good example on example on page 226 and 227 of the CFAI Book for CF. You will probably have to read it over several times to absorb the exact calculation behind it. But it does help.