Question about when a company purchases another company

[Syringer]

Let's see company X has a market cap of $100mm.

And company Y has a market cap of $25mm.

Together their market cap = $125mm yes?

Let's say then company X does a complete buyout of company Y...is company X's market cap essentially $125mm then? And so as a result company X's stock in theory should rise by 25%, since its market cap did? If not, explain why this isn't the case..

/ignorant and narrow minded

 

[her209]

Not necessarily. The value of the stock is only perceived value and not actual value. For example, let's say its rumored that company Y is going to be bought out by company X. The value of company Y's stock may (and usually increases) even though the market cap is unchanged.

 

[Matthias99]

Originally posted by: her209
Not necessarily. The value of the stock is only perceived value and not actual value. For example, let's say its rumored that company Y is going to be bought out by company X. The value of company Y's stock may (and usually increases) even though the market cap is unchanged.

Uh... market capitalization = (#of shares) * (share price). So if the stock price goes up and the number of shares stays the same, market cap goes up.

However, 'market cap' or 'perceived value' (what other kind of value is there in a free market?) may not have much relation to what the company's physical assets are actually worth. If investors think that the big company buying the small one is a bad move for the big company, its stock price may drop, resulting in a lower market cap after the merge even though the company got 'bigger'.