On Sunday evening, Meredith Corporation, a media firm, officially announced that it would acquire Time Inc., the magazine publisher of Fortune and Sports Illustrated. This deal was backed by billionaire brothers Charles and David Koch. The next morning after the announcement, stock prices for both companies immediately increased—Meredith’s stock (MDP) leaping from 61 to 69 (a 13% increase) and Time’s stock (TIME) leaping from 16.90 to 18.45 (a 9% increase). It is evident that both stock prices jumped significantly due to the news, and the simultaneous increase also reflects that the public believes that this acquisition would be mutually beneficial for both companies. An increase in stock prices indicates that people are buying more Time and Meredith’s stocks, which thus indicates that people expect that their future earnings will rise due to the acquisition. From a strategical standpoint, an expectation of higher future earnings resulting from acquisition would likely arise from expected compatibility and synergies between the two firms, in which the combined value of the integrated companies is greater than the sum of the individual firms’ values.
It is notable that the public’s pro-acquisition opinion was already reflected in the stock market prior to this official acquisition announcement. Gauging by the companies’ stock prices over the last couple weeks, it seems that the public had already anticipated that this acquisition would be a success. On November 15th, the New York Times reported that the companies were discussing a potential deal—within a day of the report, Meredith’s stock jumped from 52.35 to 59.90, a 14.4% increase. Similarly, Time’s stock jumped from 12.6 to 16.2, a 28.6% increase. These jumps in price are notably more significant following this report than the official acquisition announcement, which demonstrates that the public already anticipated the deal’s success.
The responsiveness of the market to news is further emphasized when examining the Meredith-Time relationship earlier this year in April, when both companies had also tried to strike an acquisition deal that ultimately collapsed. As news of their failure to reach an agreement came out, Time’s stock dropped from approximately $18 per share to 11.90 (a 33.9% decrease), and Meredith’s stock dropped from roughly 63 to a low of 51 (a 19% decrease) within a couple weeks. Particularly in Time’s scenario, people seem to fear that its earnings cannot recover without Meredith’s guidance, as its stock price trended toward $10 a share until reports emerged about the continuation of the acquisition discussion.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.