People often lump acquisitions and mergers together. However, they have numerous differences. For starters, acquisitions are more common in the business world than mergers. Mergers typically require two organizations of equal or near-equal size to join forces to form a single entity. Such situations are incredibly rare in the business world.
You’ll often see news articles mentioning companies merging. However, more often than not, one of these companies has acquired the smaller, less valuable one. There have been numerous acquisitions throughout history. The world’s largest acquisition, for instance, happened in 2000 when Vodafone Airtouch PLC took over Mannesmann for $183 billion. Today, that deal would be worth nearly $300 billion after adjusting for inflation.
Acquisitions inevitably affect a company’s stock. After all, acquisitions occur when one company purchases another organization. Since one company is purchasing another company’s stock to gain a controlling interest, it makes sense for both parties’ stock prices to feel the effects.
Here’s how a company’s stocks move during an acquisition:
It’s hard to prevent news from breaking out, particularly in today’s digital age. News reports about acquisitions – even rumors – are enough to cause volatility in the buying and targeted organization’s stock prices. Traders and investors try speculating on the deal. They try to establish how the deal affects their investing or trading strategy.
Likewise, they assess how much the buying organization will pay for the targeted company. Other factors for traders and investors to consider are whether the acquisition is friendly or hostile and whether an even bigger offer from a third party might occur.
Generally, acquisitions cause the target company’s stock price to rise since the buying company is taking over by paying a premium. As a result, the target company’s stock will usually rise once news about an acquisition is afoot.
Eventually, information will also break out about the acquisition’s proposed price. The stock will usually converge at this price as traders and investors try to capitalize on a potential deal.
While most people expect the target company’s stock price to fluctuate during an acquisition, the buying company’s stock also feels the effect. This effect is usually more nuanced, depending on how shareholders and market traders view the acquisition deal for the company.
The buying company’s stock price will rise if shareholders and market traders consider the acquisition deal valuable. On the other hand, the company’s stock will decline if there’s uncertainty regarding a deal.
A good example of a buying company’s stock depreciating after the acquisition is the Microsoft-LinkedIn acquisition. Microsoft announced it would be acquiring the professional social networking website by paying a premium of over 50 percent of LinkedIn’s share price. Traders, investors, and shareholders reacted to the news negatively, forcing Microsoft’s stock to decrease by three percent.
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