What Are the Effects of a Merger on Shareholders?

Businesses generally have numerous stakeholders, including employees, clients, suppliers, shareholders, etc. Shareholders typically vary depending on an organization’s size. Private corporations have fewer shareholders than publicly-listed ones since they can’t sell shares to the general public. On the other hand, it’s a different ball game with publicly-listed listed companies. These companies often have millions of outstanding shares, meaning theoretically, they can have millions of shareholders.

However, that’s not how the real world works because having so many shareholders would be impractical. Essential organization personnel, like C-suite executives and board of directors, will often hold most shares to retain control over a company’s decision-making.

Considering shareholders invest their hard-earned money into an organization, corporations try to please them at every turn.

Mergers aren’t uncommon in the business world, but they’re not as prominent as some think. Generally, business executives often group mergers and acquisitions together. However, more often than not, you’ll see companies acquiring others rather than merging.

Mergers are agreements that unite two separate business entities into a new company. The two entities will usually consolidate their assets, capital, debts, and liquidity to form a larger, more robust organization.

Research shows that mergers and acquisitions aren’t common in the business world. Figures indicate that only 0.06 percent of publicly-listed organizations engaged in mergers and acquisitions in 1984. Mergers and acquisitions have become more common since then. But they remained at a meager 0.24 percent in 2014. It isn’t surprising considering the ideal circumstances for mergers involve two equal-sized companies coming together.

Although mergers are uncommon, they happen. Most mergers prominently occur in the healthcare, technology, and financial services sectors. Some notable mergers include the Hewlett-Packard and Compaq merger and the Heinz and Kraft merger.

Since mergers result in forming a new corporate entity, they have implications for shareholders.

How Do Mergers Affect Shareholders?

Here’s how mergers affect shareholders:

A Change in the Share Price

A merger announcement undoubtedly affects the share prices of both corporations. However, the effect varies depending on the deal’s specifics and market perception.

Some mergers also occur with an exchange of shares. In such instances, the exchange ratio is pivotal for assessing whether one of the merging entities gets a premium on its stock price. An unfavorable exchange ratio often occurs during mergers, causing one party’s stock to appreciate significantly more than the others. As a result, corporations will often include collar agreements when merging. These agreements increase the exchange ratio if one entity’s stock falls below a specified price level. Collar agreements are beneficial for the merging parties because they limit the downside for company shareholders.

Mergers don’t always happen smoothly. Sometimes, regulatory approval is required. Likewise, other roadblocks can also delay mergers. These roadblocks can cause uncertainty around mergers, lowering the stock price.

Special Considerations

Common stockholders can vote on a business’s affairs at the annual general meeting. The company’s board of directors will put these items on the agenda for shareholders to approve. However, unlike most items, shareholders cannot vote on mergers and acquisitions unless the acquiring company will issue new shares to itself to complete the acquisition.

Two business owners celebrating a merger

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