Mergers & Acquisitions are considered one of the useful corporate strategies for growth and expansion of small businesses to become large corporate firms. Merger & Acquisition have widely used in developed countries but many developing countries like India are using this strategy for expansion and growth. In the last few years, India has witnessed substantial growth in M&A situations. The 2014 election where Modi-led BJP party elected as the ruling party has brought back tremendous faith in investors’ community.
But, have you ever thought about how it will affect the stock prices of the company?
How a company’s stock will move during an acquisition? – Or Will the stock rises or falls? – Even if it hasn’t crossed your mind but I’m sure now you’ll be damn curious to know.
In this article we’re going to discuss the effects the merger & acquisition on the prices of stock.
What Happen to the Stock Prices of both Companies involved in an Acquisition deal?
Generally, when a company decides to acquire another company under an acquisition deal, usually, the stock price of Target Company rises and the stock price of the Acquiring Company declines, at least in the short-term. It is because when in acquisition, the acquiring company pays a certain premium to the Target Company for the acquisition.
The shareholders of the Target Company, who need to approve that takeover, likely to approve the acquisition when the share price is above the prevailing market price. Otherwise, it won’t be profitable for them to selling the shares to the Acquiring Company, if the share price is low and there is little or no incentive for the currency owners. But, that’s not always happening!
It has seen that many shareholders agreed to sell their shares to the Acquiring Company when they see the fall in the market price of their existing shares. In that case, they agreed for the acquisition deal and to sell their shares below the current market price. The acquisition is the only way for them to regain some of their investments.
Now let’s talk about the stock price of Acquiring Company. In stock market, the stock price of Acquiring Company typically falls during an acquisition. It is because the Acquiring Company has to pay a premium to the Target Company. In order to do this, the companies generally pay this through its cash or use a large amount of debt. As a result, the stocks suffer.
But, that’s not the only factor that affects the stock price of Acquiring Company. There could be other reasons that could lead to the fall in the share price of Acquiring Company. Sometimes, investors believe that the takeover is too costly, different workplace cultures, additional debt or productivity related issue.
Therefore, it is important for Acquiring Company to consider all aspects during making an Acquisition deal. It is because either way, the deal will impact the stock prices – short term or long-term. But, if the deal goes smoothly, then the Acquiring Company can see an increase in its stock price in the long-term. Some investors use this M&A opportunity to make the profits from the price volatility. But, the volatility comes from the M&A rumors, could be a double-edged sword.
Apart from this, the market sentiment also plays a major role in the fluctuation in the stock prices of both Target and Acquiring Companies.