What happened

Mortgage real estate investment trust CYS Investments (NYSE:CYS) announced today that it had agreed to be acquired by fellow mortgage REIT Two Harbors Investment (NYSE:TWO).

Generally speaking, when an acquisition is announced, the acquisition target's stock rises and the acquirer's stock drops, and that's exactly what we're seeing here. As of 3 p.m. EDT on Thursday, CYS Investments is up by more than 10%, while Two Harbors is down by about 3%.

Paperwork entitled mortgage loan, with house keys on top.

Image Source: Getty Images.

So what

The reason for the pop in CYS Investments' stock price is due to the terms of the merger agreement.

Specifically, Two Harbors is acquiring CYS in a cash and stock deal. However, CYS shareholders will receive a total of just $15 million, which translates to less than $0.10 per share, so the majority of this deal is stock-based.

The stock portion of the deal says that CYS shareholders will receive Two Harbors shares at an exchange ratio "to be determined by dividing 96.75% of CYS' adjusted book value per share by 94.20% of Two Harbors' adjusted book value per share."

I'll spare you the mathematics, but based on the respective book values at the end of the first quarter, the merger would result in total cash and stock worth $7.79 per share as of the merger announcement -- a premium of about 18% over CYS' most recent closing price.

Now what

After today's pop, CYS Investments' stock price is about $7.30 per share, significantly less than the value of the merger's terms. The merger is subject to required closing conditions, such as stockholder votes, so there is a chance that it won't happen -- which is why the share price isn't quite reflective of the merger's potential value to CYS shareholders just yet.