Why would shares slide on the announcement of an M&A deal?

Maybe, the deal is dilutive.

What do we mean by dilutive?

It means that whatever metric we use to benchmark the deal performance is falling after the transaction occurs.

The metric we often use in M&A is EPS so see the short-term implications of the transaction.

So, if the market views the deal as dilutive, shares may slide of the acquirer.

But, what about the target?

Well, in most cases, the buyer is paying a purchase premium to acquire the target company. This means that its shares will usually trade up between the current price and the purchase price.

But take Salesforce which is recently in talks with purchasing Informatica for ~$11.3bn.

Both stocks were down on the news.

So why didn’t it bounce?

The potential deal price was below where the stock was trading at close.

Can such a deal go through? No. The board of directors would not satisfy their fiduciary duties by selling the company for less than it’s worth.

So, the market was reassessing how likely the deal would close. This depends on how likely Salesforce is to raise its bid to acquire the company for above market value.

If Salesforce does not raise their bid, the acquisition will not happen. So, the market is pricing in an expectation that the deal does not go through.

There is also more context that can be applied to better understand the situation.

Salesforce in 2023 was facing pressure from ValueAct Capital and Elliott Management, about their dealmaking and corporate strategy.

So, Salesforce swiftly cut costs, laying off 10% of its workforce, and increased share buybacks. It also disbanded its M&A board committee over concerns that they were pursuing too many dilutive deals.

The market is not reacting too favorably to the company reentering M&A talks after pulling back their M&A focus last year. This would be their second largest acquisition since Slack at $28bn in 2020.

Bottom-line? The market prices the stocks based on expectations of what will happen.