{"id":222,"date":"2020-02-06T12:13:21","date_gmt":"2020-02-06T12:13:21","guid":{"rendered":"https:\/\/www.invest19.com\/blog\/?p=222"},"modified":"2020-02-06T12:13:22","modified_gmt":"2020-02-06T12:13:22","slug":"how-mergers-and-acquisitions-affect-stock-prices","status":"publish","type":"post","link":"https:\/\/www.invest19.com\/blog\/how-mergers-and-acquisitions-affect-stock-prices\/","title":{"rendered":"How Mergers and Acquisitions Affect Stock Prices?"},"content":{"rendered":"
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The theme of merger and acquisition is a common phenomenon\nacross the companies and industries. Even if you\u2019re merely browsing the news\nweb or flipping the pages, you must have heard about the news of companies\ngoing for mergers and acquisitions. But what really is merger and acquisition\nand does that affect the stock prices in the market? We here will look into\nthis aspect. Read along.<\/p>\n\n\n\n

What are Mergers and Acquisitions?<\/h2>\n\n\n\n

In layman terms, mergers and acquisitions are about the\nconsolidation of companies or assets via a financial transaction or asset\ntransfer. These are a common theme for companies and many opt for it various\nreasons like business expansion, growth, market capture and more. (We\u2019ll discuss more it down below) <\/em><\/p>\n\n\n\n

Mergers and acquisitions are often used along\ninterchangeably around but they do hold different meanings if we look at it. A\nmerger is more about two companies coming together or amalgamating into one.\nFor Say, X Ltd and Y Ltd merge. After the merger, they become XY Ltd and\ncontinue operating the business operations as planned. Whilst in the case of acquisition\nX Ltd takes over Y Ltd and Y Ltd ceases to exist after the acquisition. In the\ncase of acquisition, for say, continuing the above example, X Ltd will take\nover Y Ltd and will pay off the stockholders and owners as prescribed in the mandate\nduring the acquisition. <\/p>\n\n\n\n

Why do companies perform M & A?<\/h2>\n\n\n\n

There are a host of reasons as to why companies opt for\nmergers and acquisitions. But the major reasons are to scale up the economics\nof the companies and gain different grounds that were previously hard to\naccess. M & A gives a company increased capability in terms of performance.\nThey can call upon increased research and development, or manufacturing\nfacilities or new technologies that will help them to gain a vital advantage in\nthe industry. Some of the companies also opt for the merger and acquisition so\nthat they can diversify their product portfolio and expand the horizons. Two\ndifferent companies with different product lineage can merge and expand their\nproduct lineups. Another major reason is also the cut back of the costs. If two\ncompanies are in the same line of the field then mergers or acquisitions will\nallow them to cut back on the costs significantly and help improve the profit\nrange for them. <\/p>\n\n\n\n

How does M & A affects the stock prices?<\/h2>\n\n\n\n

Merger and acquisition have quite an impact on stock prices\nand the stock market. The major onus is how the market reacts to the news of\nthe merger and acquisition. Sometime it may be favourable while sometime it may\ntread on the line of unfavourable. <\/p>\n\n\n\n

In the case of acquisition, the typical theme is that the\nstock prices of the company which is about to be acquired generally increases in\nthe short term and the share price of the acquirer company decline in the short\nrun. Whenever an acquisition occurs, the acquirer company tends to pay the\npremium for the acquisition. The reason being that if the acquiring company\ndoes not pay a premium then the shareholders of the company to be acquired will\nnot approve the takeover. The share price of the acquiring company will grow\naround in the long run once the acquisition is completed as the company\u2019s\nbusiness operations come into the expected growth line. The acquisition also\nhelps a company to acquire economic moat and allows the company to exercise\ngreater ability in terms of performance and all. This will show the flex in the\nshare price as the prices will increase along with time. <\/p>\n\n\n\n

When it comes to the merger, the share price of the new\ncompany after the merger will significantly be higher than the previous levels.\nThe chances are likely to see the new company gain a stronghold on the economic\ncondition and market after the merger. This will allow them to generate long\nterm performance and result in substantially increasing the value of the\ncompany. That will showcase in the share price too resulting in the share price\nto increase along. <\/p>\n\n\n\n

What to do with your Stock during M&A Situation? <\/h2>\n\n\n\n

There are different scenarios that may occur during the\nmerger and acquisition situation. We here will analyze it via two different\nscenarios. Let\u2019s find out.<\/p>\n\n\n\n