When one company acquires another company, usually the stock price of the target company increases and the stock price of the acquirer decline in the short term.
The objective of the company’s stock usually rises for the acquisition of the company has to pay a premium for the acquisition. The reason for premium is that the shareholders of the target company, which must approve a takeover, is unlikely to approve this purchase, if the stock price is above the prevailing market price. If the takeover offer equates to a lower price than the current price of the target company, there is no incentive for current owners to sell their shares to the acquiring company.
There are exceptions, of course, as in the case of a company that is losing money and its stock price suffered. The acquisition may be the only way for shareholders to receive a portion of their investments back. As a result, shareholders may vote to sell the target company at a lower price than the current market. For example, target can sell at a discount if the company has large debts and not to serve him or to obtain financing from the capital markets for debt restructuring.
The acquisition of shares in a company, usually falls at the time of purchase. After the acquisition, the company must pay a premium for the target company, they can exhaust their cash or use large amounts of debt to Finance the acquisition. As a result, shares could be affected.
There are other factors and scenarios that can cause the stock prices of acquiring companies fall in the course of the acquisition:
- If investors believe that the price is too expensive or “premium” for the company are too high
- A rapid process of integration, such as regulatory issues or problems associated with integration of different cultures in the workplace
- Loss of productivity due to power struggles,
- Additional debts or unexpected expenses incurred as a result of buying.
It is important to consider both short-term and long-term impact on the stock price of the acquirer. If the deal goes smoothly, it will be good for the acquiring company in the long run and will probably lead to a higher stock price.
It is up to the leadership of company acquisition cost of the target company during the acquisition. In addition, if the management team is struggling or experiencing difficulties with transition and integration, the deal could push the shares of the acquirer over the long term.
Stock prices of potential target companies tend to be growth before the merger or acquisition was announced. Some investors buy stocks, hoping to acquisition. Shopping mergers and rumors about the reasons for price fluctuations, and it can be beneficial. However, volatility is a double-edged sword, meaning that if the takeover rumors fail to materialize in the transaction, the share price of potential target companies are likely to decline significantly.
Economic situation and market sentiment play an important role in whether the acquisition of shares eventually raised after the capture and successful integration of the target company. Absorption can be considered as a bullish view of the market and industry the Executive management of the acquirer. In other words, the company is unlikely to commit billions of dollars as investments in the form of joining, if they don’t believe in long-term profit growth. That is why the increase of mergers and acquisitions are often viewed by investors as positive sentiment in the market.
To learn more about this topic, check out the Basics of mergers and acquisitions.