What happened

Shares of office furniture maker Knoll (NYSE:KNL) surged upward by 34% as trading got underway on Monday. At the same time, competitor Herman Miller (NASDAQ:MLHR) saw its stock drop 12.5%. The news driving both moves was exactly the same, and investors' responses here were pretty much what you'd expect.

So what

Over the weekend, Herman Miller agreed to acquire Knoll in a $1.8 billion cash-and-stock deal. After the transaction is completed, Herman Miller shareholders will own 78% of the combined entity with former Knoll shareholders owning the remaining 22%. Knoll shareholders will receive $11 in cash plus 0.32 shares of Herman Miller for each Knoll share they own, which amounts to a purchase price of $25.06 per share based on the price of Herman Miller shares prior to the deal's announcement. That's a hefty 45% premium to where Knoll ended trading Friday.  

A business person strategically placing wooden blocks on a block tower.

Image source: Getty Images.

The two stocks are likely to trade in lockstep for now, given the stock component of the deal. So the drop in Herman Miller's share price Monday morning effectively limited the upside potential for Knoll shares. This partly explains why Knoll didn't rise by 45%. That said, the market is also factoring in the normal discount applied to such deals given the risk that they may fall apart.

Although the companies offered the usual glowing reviews of the deal, the driver of this merger appears to boil down to a desire for greater scale, plus the ability to trim $100 million in annual costs out of the combined businesses (so-called synergies). That said, Herman Miller expects the acquisition to be accretive to cash earnings in its first year, so, if things go according to plans, it seems like a solid move.  

Now what

Based on the dramatic stock price moves here, it's pretty obvious that the cat is out of the bag. With such a large gain behind them, Knoll shareholders now have to decide if they want to be investors in Herman Miller, or if they just want to take the money and run. Herman Miller investors, meanwhile, need to decide if this acquisition fits with their long-term expectations. While there's no rush for investors in either company to make up their minds, the deal is expected to close by the end of the third quarter.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.