You must’ve seen an acquisition in Indian and global market plenty times when a company takes control over another company and the later one ceases to exist. When that happens, the stocks continue to trade for the acquiring company but not of the acquired company. However, the merger happens between two companies of the equivalent size which come together to form a single company. So, when it is about the acquisition, you should be alert towards this action that is taking place in the market very often.
Such corporate processes raise some negative implications in the minds of people. So, if you’re investing or trading in the stock market then you should be very cautious towards acquisition because there will always be M&A impact on share prices of both companies in the short term.
How does acquisition affect the stock prices of both companies?
Well, one thing is clear – When a company decides to acquire another company then the stock price of one will rise and another’s fall. Now the question is which company’s stock price rise and which ones fall?
Generally, in the acquisition, the share price of acquiring company fall down and the share price of the acquired company will rise. It is because when the acquiring company plans for acquisition, it has to pay a somewhat extra premium than the worth of the target company. Otherwise, the promoters of the target company will not come out forward for acquisition. And this also the reason why the share price of acquiring company falls down to pay little extra to the bought up company which sometimes, reduce the net worth of buying the company in short-term.
Many companies acquire other companies in order to expand itself and come together with other small companies to eliminate competition and growth. But, sometimes, those plans backfire – especially when the acquired company has debt and business deal fail to dematerialize among others. If that happens, the share price of the bought up company with fall down remarkably.
It is also possible for rising in the share price of bought up a company to rise above the deal price in the hope that the target firm has some reputation and brand value and some other firm will come forward to take over the firm.
So, it is important to consider both the short-term and long-term impact of the acquisition on the stock prices of both companies. Nevertheless, if the acquisition goes smoothly, the acquiring company can see a rise in share price in the long run. Partially, it also depends upon the management of acquiring a company to the value the target company during the acquisition process.
Hope, this article helped you in a way you expected it to be. Nevertheless, if you have any query over acquisition impact or would like to add something here then doesn’t forget to mention in the comment section below.