On April 19, Lexmark (LXK) announced that they are going to be acquired for $40.50 per share.
The stock price closed at $34.66 on April 19, and the next day it opened at $38.12.
The price trended between $38.00 and $39.00 until two days ago.
So far it all makes sense to me.
However, at the moment it is trading at just $36.87.
It dropped 2.2% today, while the S&P500 only lost 0.25% today.
The deal is expected to close in 4-6 months from now.
There will also be a regular quarterly dividend in June of $0.36.
So you can make 10.8% in about 6 months if the deal closes.
There are no headlines, press releases, SEC filings, etc today. At least not that I can find.
There also do not seem to be any regulatory issues.
One of the buyers is Chinese, and they don’t have a good reputation lately. But that was already known on April 19.
Some lawyer companies are threatening to sue Lexmark, but the last one of those was announced on last Monday.
The price should have dropped earlier if that would be a problem.
So my question is, can anyone explain why Lexmark’s price isn’t a lot closer to $40.50??
Thanks,
Peter
NOTE: I have worked for Lexmark in the past. That’s how it got on my radar. But I left 3 years ago.
The theory is that after a company announces that it is going to be acquired (or an acquirer announces a hostile bid), the stock prices jumps to an amount equal to:
(the offered acquisition price) - (some value reflecting the possibility that the deal will not go through)
The acquisition price is usually known, of course, but the deducted value, which is actually an implied option, is a matter that the market settles on. It reflects two things: The time left before the deal goes through and the likelihood that the deal is going to go through. (You can also assume that there’s some random-walky element at any given time, but I’m ignoring it here.)
The deducted value is expected to go down over time as the time value diminishes. The stock price has gone down since the announcement significantly more than the market, indicating that some people have grown more skeptical about this deal going through. I know nothing about the specifics of this case, though.
We suggest that users make use of the “Allow mergers” option in the portfolio tool, on the Restrictions tab. It defaults to no, so this kind of situation shouldn’t be in most people’s portfolios. The problem is that Portfolio123 rules assume that fundamental or technical rules will have some relevance to the price. In the case of acquisitions, the price has a relation to the announced price offer, not to anything in our database.
In a screen, you can use the following rule to eliminate stocks with a merger announcement active: