It is fairly common for both small and large companies to merge with and acquire other firms to gain a competitive edge. Although mergers and acquisitions are often considered together, the end result is obviously slightly different. Mergers tend to occur when both companies are on more equal footing, and many of the attributes of each company are retained post-merger to maximize the results of the integration. On the other hand, acquisitions usually involve a larger company purchasing another company, with some aspects of the smaller company remaining and others likely being changed to suit the needs of the acquiring company.
With both mergers and acquisitions, the deal may be accomplished via a cash transaction, stock exchange, or a mixture of both. In a straight acquisition, the ownership of the target company is usually transferred to the acquiring company in full. Granted, some of the folks from the management team or employees may remain within the entity that now comprises both the acquiring entity and the target entity, but the ownership structure is generally different. Here is a quick look at what happens to stock when a company is acquired.
When a large company announces its intention to acquire another business, there is often nervousness and uncertainty as to how the transaction will play out. If this occurs, the value of the acquiring company’s stock often dips. Of course, a lot of prospective acquisitions can generate positive buzz, and the excitement may actually help boost stock prices as well. More often than not, however, it is the former that occurs, although the decline in the stock price is often slight and only lasts temporarily. In addition, the acquiring company’s stock is more likely to drop a bit because the price the company has to pay to acquire the target entity is usually a little high. This is because the company must pay a premium to ensure the target company will go through with the transaction.
On the other hand, the target company’s stock usually experiences a nice little boost when the public learns that it is going to be acquired. One reason the target company’s stock goes up is because of that premium that the acquiring entity is shelling out to seal the deal. Of course, the target company’s stock is also likely to go up a bit because the fact that it is going to be acquired is often a sign of the company’s desirability. After all, companies do not scoop up other entities via an acquisition unless the target company has something attractive to offer.
It is much harder to know or predict how the company’s stock will fare post-acquisition, as there are so many facets of the closing and post-acquisition integration that will impact the success of the venture. Obviously, the goal is to increase shareholder value and capitalize on the strengths of each company to allow the newly integrated business to become bigger and better. Unfortunately, the reality of integrating two distinct businesses can often be quite difficult to navigate, so the increase in value may not occur right away. But, if the appropriate time and resources were devoted to researching and planning for the deal and ensuring a successful post-acquisition integration, gradual increases in stock value are bound to happen.