In the corporate world, company leaders are constantly looking for opportunities to expand operations, improve efficiency, and ultimately boost value for stakeholders. One of the best ways to do this is through mergers and acquisitions, which allow companies to absorb or integrate with other, usually similar companies in pursuit of higher goals.
In a merger or acquisition, companies can pool their resources, integrate complementary forms of expertise, expand their reach, and achieve more revenue growth – if done properly. It makes sense, then, that many companies looking to merge or acquire other companies should see an increase in perceived value.
But is this always the case? How does a merger affect a company’s stock price?
Potential Impact on Stocks
There are several potential ways that a merger or acquisition can impact company stock.
Assuming both companies are publicly traded, much depends on the nature of the deal and how it’s expected to be completed. If Company A is acquiring Company B, shareholders of Company B might be entitled to shares of Company A equivalent to their previous holdings once the deal is completed. If Company A and Company B are officially merging in a somewhat egalitarian sense, both companies may be dissolved so that a new company can be formed; shares will be distributed according to previous holdings in this way as well.
No matter what, after the deal is publicly announced, it’s likely that the share price of one or both companies involved in the deal will change. They may go up or down, based on perceptions of the nature of the deal. If the deal is perceived as favorable and likely to complete, share prices will go up. If the deal is perceived as not favorable or unlikely to complete, share prices may remain neutral or go down. And, of course, after the deal is completed, shares may undergo a period of volatility as investors reset expectations and witness the rollout of an entirely new business schema.
Variables to Note
These are some of the most important variables that will dictate stock prices of merging businesses:
· The state of each company. First, you’ll need to think about the current state of each company. If Company A is in excellent financial health and Company B has been a rising star in the industry, it makes sense that both Company A and Company B would benefit from a merger. If Company A has been struggling to remain relevant for many years, and Company B hasn’t yet established itself, the deal is going to be much more uncertain and volatile.
· The likelihood of the deal closing. Just because a merger or acquisition has been announced doesn’t mean it’s going to be completed. Teams of lawyers must review the details of the deal thoroughly and both companies need to do their own due diligence to verify the integrity of all relevant details. If the deal is unlikely to close, or if investors suspect there are dirty truths to uncover, the stock price may fall.
· The offer. Much depends on the offer as well. If Company A makes an exceptionally high offer to acquire Company B, the share price of Company B may rise significantly as investors anticipate a surge in value. In the same situation, shares of Company A may actually fall if investors believe the company is overbidding on this acquisition. The reverse is also true; if the acquiring company makes a low bid, investors holding the acquired company may see a fall in share prices, assuming they have confidence the deal will go through.
· The potential value. What is the purpose of this partnership and how much value could it add to each organization? Sometimes, these deals are straightforward, allowing both companies to have broader reach and greater efficiency. Other times, the synergy is more ambiguous. If investors can clearly see the value of the partnership, share prices of both companies will rise.
· The leadership. Who’s in charge of these companies? As is the case with any type of stock investment, investors look to leadership to make their decisions.
· The plan. How is this deal going to finalize? How is it going to roll out? If investors feel confident in the plan, share prices will rise.
As an investor, it’s important to remain up to date with the latest information on the companies you’re watching. The more you learn about a potential deal, the less likely you’ll be to get blindsided by a sudden drop or surge in pricing.
That said, mergers and acquisitions can be complicated and chaotic deals, making it difficult to predict how prices are going to change. Even the best investor, with ample due diligence, can struggle to make the correct play in these situations – which is why many investors avoid the gamble altogether.