Recent years have seen mergers and acquisitions of quite some famous companies. As an investor, you are likely to wonder how do mergers and acquisitions affect stock prices? And whether you should be concerned while buying stocks of companies that have recently undergone this transition.
What are Mergers and Acquisitions?
Mergers and acquisitions are considered to be strategies that are helpful in the growth and expansion of a business. Sometimes, a merger takes place to reduce expenses, increase resources or gain an edge over other companies in the market. Hence, it becomes even more important to know how company mergers affect stock prices.
Mostly, ‘mergers’ that you hear about might even be ‘acquisitions’. Mergers and acquisitions are often used interchangeably, but they are quite different. According to the Corporate Finance Institute, a merger occurs when two organisations come together and form a new business entity altogether. On the other hand, an acquisition occurs when a larger organisation takes over a smaller one, by buying a controlling stake.
How do These Transactions Impact the Price of Stocks?
In a merger, the old companies cease to exist. In such a situation, their stock is cancelled, and the stockholders get shares of the new company. The crux here is the reaction of the market to that merger and acquisition. It may have a positive as well as a negative effect.
When a merger takes place, it is not necessary that the prices of stock change. There are chances that the investor will receive the same return from the new company. However, in an acquisition, a company is acquiring another one, liable to pay more to the shareholders in the form of a ‘premium’. Also, if the acquiring company does not provide this premium, the shareholders can disapprove of the takeover.
For publicly traded companies, a merger or acquisition could have a positive or a negative impact on the stock prices, depending upon the impact the transaction creates for the companies involved.
How to Safeguard Your Financial Interests?
Mergers and acquisitions are part and parcel of any business operation. It is quite common for companies to opt for the same to expand their business and their product line. As these practices do impact the stock prices of companies, you need to conduct a thorough research before buying stocks of companies that are going through this transition.
To make wise investment decisions that are tailormade for your goals and risk profile, you could also get in touch with a financial advisor that could help you to create wealth for long term and short term.