Stocks / Indices
Company Mergers- Why They OccurFebruary 19, 2020
Companies acquire or merge with other companies because the boards of both companies have decided that a merger will enable the newly merged entity to be stronger and more profitable in the future with a bigger market share of the products or services it provides.
A company merger or an acquisition usually benefits both the new firm and perhaps even the customers.
Who it certainly affects are the stockholders of both companies almost immediately in either a positive or a negative way. There is a school of opinion that a merger or acquisition creates greater shareholder value.
What happens to a stock when a company is bought
It’s not just the stockholders of the acquiring company that see changes in the value of their shares; it’s also the stockholders of the acquired company.
These changes in value tend to occur prior to the official announcement of the merger and only if the stocks of the acquired company are purchased in cash.
At that point, the shareholders of the company which is being acquired will see their shares increase in value. Conversely, the shareholders of the acquiring company will see their shares lose value and move lower.
Existing shareholders of the target company always get the opportunity to buy stocks at a discount.
Those who take up this option will find that their stock value will rise substantially during the merger talks. It offers them the prospect of making large returns on their investments.
The stock, however, never rises to the level offered by the acquiring company to the target company.
Still, this stock merger process enables stockholders to buy and, a short time after the merger has been completed, sell the stock at a very nice profit.
Stock buyout or stock-for-stock merger
If the acquiring company offers a stock-for-stock buyout of the target company, the target company’s stockholders can, if they want to, keep their shares, as – in this case – the stock of the target company will have been replaced by the stock of the company acquiring the target company.
Even though the shareholders in the acquired company have the same amount of shares after the stock merger, their powers of voting have changed because there are more shares (theirs plus those of the acquiring company) outstanding than there were before the merger.
As a merger creates a much larger business and superior resources, the potential for the company to grow expands significantly. This enables the stockholders who have kept their shares to experience significant long-term gains on their investment.
Therefore, with the new company operating as a bigger fish in the same pool, shareholder equity will be able to sustain much greater growth than was possible before the merger.