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Why do people buy stocks at higher price in merger?
Without any highly credible anticipation of a company being a target of a pending takeover, its common stock will normally trade at what can be considered non-control or "passive market" prices, i.e. prices that passive securities investors pay or receive for each share of stock. When there is talk or suggestion of a publicly traded company's being an acquisition target, it begins to trade at "control market" prices, i.e. prices that an investor or group of them is expected to pay in order to control the company.  In most cases control requires a would-be control shareholder to own half a company's total votes (not necessarily stock) plus one additional vote and to pay a greater price than passive market prices to non-control investors (and sometimes to other control investors). The difference between these two market prices is termed a "control premium."  The appropriateness and value of this premium has been upheld in case law, with some conflicting opinions, in Delaware Chancery Court (see the reference below; LinkedIn Corp. is incorporated in the state), most other US states' courts and those of many countries with active stock markets. The amount of premium is largely determined by investment bankers who, in addition to applying other valuation approaches, review most recently available similar transactions for premiums paid and advise (formally in an "opinion letter") their clients what range of prices to pay or accept. In addition to increasing the likelihood of being outbid by a third-party, failure to pay an adequate premium is often grounds for class action lawsuits that may take years to resolve with great uncertainty for most parties involved. For a recent example and more details see this media opinion and overview about Dell Inc. being taken private in 2013, the lawsuits that transaction prompted and the court's ruling in 2016 in favor of passive shareholder plaintiffs.  Though it has more to do with determining fair valuation than specifically premiums, the case illustrates instruments and means used by some courts to protect non-control, passive shareholders. ========== REFERENCE As a reference, in a 2005 note written by a major US-based international corporate law firm, it noted with respect to Delaware courts, which adjudicate most major shareholder conflicts as the state has a disproportionate share of large companies in its domicile, that control premiums may not necessarily be paid to minority shareholders if the acquirer gains control of a company that continues to have minority shareholders, i.e. not a full acquisition: Delaware case law is clear that the value of a dissenting [target company's]   stockholder’s shares is not to be reduced to impose a minority   discount reflecting the lack of the stockholders’ control over the   corporation. Indeed, this appears to be the rationale for valuing the   target corporation as a whole and allocating a proportionate share of   that value to the shares of [a] dissenting stockholder [exercising his appraisal rights in seeking to challenge the value the target company's board of directors placed on his shares]. At the same   time, Delaware courts have suggested, without explanation, that the   value of the corporation as a whole, and as a going concern, should   not include a control premium of the type that might be realized in a   sale of the corporation.