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Scientific Games Shares Take The Typical Merger Hit

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Nov. 27 2019, Updated 6:28 p.m. ET

Acquisition

Scientific Games (SGMS) acquired Bally Technologies, or Bally, for $83.30 per share—a premium of ~37% based on Bally’s closing price per share of $60.80 on July 30, 2014. That date was Bally’s last trade day immediately prior to the announcement of the merger.

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Impact on share price

The above chart shows that Scientific Games shares fell by ~15% in the three days following the merger. That’s typical when a company acquires another company for a premium.

Bally’s share price rose by 29.1% on the day of announcement of the merger. Similarly, that’s because SGMS would acquire Bally by paying a significant premium. Unless SGMS offered a premium to Bally’s shares, there would have been little incentive for the owners of Bally to sell their shares to SGMS.

In another example, last year, when GTECH agreed to acquire International Game Technology (IGT), IGT shares surged over 9% on the day of the announcement.

The acquiring company’s stock usually falls because it pays a premium to acquire the target company. Also, there are often a number of uncertainties involved with acquisition, including the additional debt that must be incurred to make the purchase, accounting issues, restructuring charges, and others.

To avoid the risk of investing in a single casino stock, investors may invest in the Consumer Discretionary Select Sector SPDR Fund (XLY), the VanEck Vectors Gaming ETF (BJK), and the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) that provide diversified exposure to the leisure industry.

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