Table of Contents
The topic of mergers and acquisitions is a regular occurrence in business and industry. Even if you’re just surfing the news or scrolling through the pages, you’ve probably heard about news about companies embarking on mergers and acquisitions. But what is an M&A and what effect does it have on stock prices in the market? Here we will focus on this aspect.
What are mergers and acquisitions?
Simply put, mergers and acquisitions are the consolidation of businesses or assets through a financial transaction or asset transfer. This is a common theme for businesses and many people choose for many different reasons such as business expansion, growth, market dominance, etc.
Mergers and acquisitions are often used interchangeably, but they have different meanings if we consider them. Rather, a merger is two companies merging or joining into one.
What is the need for mergers and acquisitions?
There are a host of reasons as to why companies opt for mergers and acquisitions. But the major reasons are to scale up the economics of the companies and gain different grounds that were previously hard to access. Mergers and acquisitions give a company increased capability in terms of performance. They can call upon increased research and development, or manufacturing facilities or new technologies that will help them to gain a vital advantage in the industry.
Some of the companies also opt for the merger and acquisition so that they can diversify their product portfolio and expand their horizons. Two different companies with different product lines can merge and expand their product lines. Another major reason is also the reduced cost. If two companies operate in the same industry, a merger or acquisition will allow them to significantly reduce costs and improve profit margins.
How does mergers and acquisitions affect stock prices?
Mergers and acquisitions have a great influence on stock prices and the stock market. The primary responsibility is how the market reacts to announcements of mergers and acquisitions. Sometimes it can be favorable, while sometimes it can be on the unfavorable path.
In the case of an acquisition, the typical theme is that the share price of the acquired company usually increases in the short term and the share price of the acquired company decreases in the short term. Whenever an acquisition happens, the acquiring company tends to pay a premium for the acquisition. The reason for this is that if the acquiring company does not pay the premium, the shareholders of the acquired company will not approve the takeover. The share price of the acquiring company will increase in the long term once the acquisition is complete, as the company’s business enters the expected growth curve. Acquisitions also give a company an economic moat and allow the company to exercise more capacity in terms of performance and all. This will show the flexibility of the stock price as the price increases over time.
Regarding the merger, the share price of the new company after the merger will be significantly higher than the previous levels. It is likely that the new company will impose itself on the economic and market situation after the merger. This will allow them to generate lasting performance and significantly increase the value of the company. This will also be reflected in the stock price, which will cause the stock price to go up.
What to do with your stake in a merger and acquisition?
There are many different scenarios that can occur in a merger and acquisition situation. Here we will analyze it through two different scenarios. Let’s find out together.
- When you own shares:
If you are an existing shareholder and the company whose shares you own participates in an M&A deal, there are two scenarios that will occur. When the business is acquired, you can either take the opportunity or trade the stock for money. Or you could pick a new company and hold the stock and see if the value increases over the long term. If you are a shareholder of the acquiring company, the value of your stock may decrease for a short time, but it will soon gain momentum and increase. In the event of a consolidation, you can stay the same as the value of the stock will soon increase.
- When you don’t own the actions:
When you don’t own the actions, the scene looks a little different. During the merger and acquisition phase, prices fluctuate at a premium to the acquiring company, so it’s wise to steer clear. In the case of an acquired company, the initial price is a bit low and will increase when the business is fully operational. Therefore, it would be wise to consider and then enter the market.
Mergers and acquisitions are an integral part of business operations and operations, and many companies are choosing similar activities to give their superiors an edge. This process of mergers and acquisitions tends to affect a company’s stock price immediately afterwards and will be based on how companies tend to behave over the long term. If the company is staying true to its operating goals, chances are the stock price will increase over time. As an investor, you should carefully study the market before investing.
Entri is a learning platform built by well-known experts in the industry to help students analyze different types of entrance tests without having to worry about learning materials and crash courses. You can take our video analytics and video classes provided by experts to begin preparing for this banking exam and crack it easily.
We hope you find this article really informative and helpful and also please do not hesitate to contact us for any doubts. You can also download our Entri App for free and start preparing for any competitive exams. This app provides a series of quizzes, Mock tests, PDFs, past question papers, and much more.