Merger and Acquisition: What Are the Types and How Shares React?
No doubt, each investor is interested what happens to the company they put their money in after it goes through a merger or acquisition. What to do, especially with the shares in your portfolio? Most importantly, what profit one will receive after such business events? This article attempts at answering these questions and giving some options of behavior in the case of merger or acquisition.
Merger is a process in which two or more companies take some economic actions to enlarge or expand their business. The abbreviation M&A stands for Mergers and Acquisitions. After the merger, a larger company appears in the market. The aim of the process is to make business more efficient, increase production powers, take over new markets, and create a full or partial monopoly.
There are two main types of M&A:
- Friendly M&A happen when two companies agree on mutually profitable conditions and act by the agreement.
- Hostile M&A happen when the management of the acquired company does not agree with the unprofitable conditions of the merger but usually has no choice. A hostile merger becomes possible when the acquiring company owns over 30% of the company that is acquired. If the former holds the control package of stocks (over 50%), the latter has no chances to oppose the merger.
There several ways in which companies can merge.
- Horizontal merger happens when the company consolidates to capture a larger part of the market. It is the case of companies working on the same principles in one sector of economy and producing similar products.
- Vertical merger happens with companies that work in different spheres but connected by some technological process. The aim is to unite all production processes in one legal entity. For example: mining, processing the crude material, producing and selling the product to the final consumer. This way the new company unites the whole production cycle, which makes it more competitive and makes it easier to design new products.
- Homogenous mergeris a merger of companies producing interrelated products. For example, a company producing wooden things can merge with a wood purveyor.
- Merger for expanding sales market is a merger of geographically distant companies. Transborder mergers are most widespread in banking and among food retailers.
- Conglomerate (circle) merger is a series of mergers of small companies from various business spheres to create one corporation in the end. As a result, the final company covers for various products, services, and spheres of business.
- Reverse merger happens when a private company buys a public one to save up on an IPO. This is how all SPACs work.
The influence of M&A on the quotations
Firstly, let us get to know what happens to the shares of merging companies. In most cases, the quotations of the acquired company grow. The reason is a profitable share exchange offer and other bonuses for investors and shareholders.
Normally, the shares of the acquiring company can drop. The reason is increased expenses at the start. After a successful merger and successful reshuffling, the shares recover and start growing.
In certain cases, it so happens that the shares of the companies on both sides start falling after the merger is announced. Usually this happens when investors do not think that the merger is reasonable and see no perspectives.
The opposite can also happen: the shares of both companies grow. This happens when the merger looks promising for all and investors see no bad sides of it.
Good sides are:
- Increased competitiveness
- Reaching positive financial performance faster
- Buying underprices assets
- Buying already organized production and sales patterns and producing novelties
- Expansion of geographic presence.
The bad sides would be:
- Risks of mistake s in assessing the potential of the future company
- Financial losses and expenses due to the M&A process
- Complications of merging when the work spheres are different
- Issues with the employees of the acquired company. Personnel and management can be unpredictable.
What do investors do at M&A?
When you hold the shares of the acquired company, you are normally in a better position. The shares grow (here we neglect the exceptions), and exchange conditions are appealing. In this case, the holder of the new share makes a profit and gets a share of the new company.
The shareholders of the acquiring company might suffer some losses or slumps in the portfolio. There are three things you could do:
- Sell the asset before it falls in price and buy it again after it reaches some conditional low. This is, of course, risky, but this you can make an additional profit. However, keep in mind that from an investor you become a speculator, which is, no doubt, risky.
- Do nothing until the M&A process is complete and hope that the shares will grow after it is over.
- Get rid of your shares and look for better investment options.
M&A is a market trade that has both good and bad sides. To make the best of it you need to study and understand all the processes. A good way to do it is to study identical agreements in other companies. This does not guarantee you success yet might give an idea of what will happen and what are the stumbling rocks.
M&A is a complicated process that can take a long time, so be patient and try to avoid emotional decisions.
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