M&A normally are big events and many parties want to benefit from them, thus the market is sensitive to M&A, being able to detect deals before it actually happen.
In an acquisition, immediate capital gains are transferred from shareholders of the buyer to those of the seller in the form of premium. Synergistic gains will be realized later by increase in operations of the combined firm.
In the event of an M&A, stock price of the target goes up because shareholders of the target expect to receive an amount exceeding current fair value of the firm in the form of M&A premium from the buyer. Concurrently, stock price the buyer usually falls also because of premium the buyer has to pay the seller.
In light of this knowledge, risk arbitrageurs usually long the stock of the target and short the bidder. This normally put price pressure on both stocks, making target’s higher and buyer’s lower.
In the Palm case, arbitrageurs had taken action nearly 2 weeks before the acquisition announcement by Hewlett-Packard. The capital market was relatively efficient in predicting the acquisition.
Also for this case, price pressure on HP was far more complex since multiple factors may affect the company stock price. Palm stock was simpler, I attributed the increase in stock price partly to the acquisition.
In reality, Palm has been in discussion of selling and HP was indeed a surprise buyer.