Have you found yourself in a situation where you hold the stock of a company you invested in and
suddenly you heard the news that some acquisition deal was announced?
Or we can say Merger & Acquisition (M&A) Deal. It’s no big deal but it is like the “Diwali” for every investor who found himself/herself in a position where he is investing in the stock of the company who was recently involved in some M&A deal. When it happened, the shares skyrocketed in the stock market. It is because, during an acquisition, an acquiring company has to pay a premium for the acquisition to the target company which made target company’s stock rises and acquiring company’s falls. It is common in M&A acquisition because shareholders of the target company will not approve the acquisition unless the stock price is above the market price. Anyways, what’s important is to decide the next strategy.
Should take the opportunity and leave or wait for bigger ones?
Also, what if you don’t own any shares? Let’s discuss each scenario one by one.
When You Own the Stock
When you own the stock of the acquiring company that’s getting acquired then you have only two
Like we said above, take the opportunity and leave or wait for the bigger ones.
But, it is not that easy to decide, especially when the acquisition deals never trade for the offer price
instantly. It is because of some market factors in a risk discount and a time discount which by the way
both are fluid. When you decide to sell out your shares, the market participants considering the options
whether they should invest in M&A target or not.
Usually, in such situations, especially in markets where corporate balance sheets are stuffed with cash, it
would be a wonderful idea to get your gains and leave. In doing this, you will only pay a small fee but at
least you will be taking all the risks off the table.
When You Don’t Own the Stock
Just now we’ve discussed that when stockholders of acquiring company decide to sell out then the
market participants consider their options whether they should invest in M&A target or not.
Now if you are one of the market participants who found himself/herself in a position where you have the chance to buy the stock of company involved in MA, would you buy it?
Have you ever thought that why there’s a premium on an M&A deal?
It is because the shareholders of a target company wanted to protect their risk-free gains. Nevertheless,
that’s not the point. All you need to know is that the premium size gets smaller by the time deal gets
close. So, if you are a beginner then buying stocks after M&A deal announcement is probably not a good
Final Thoughts: –
There’s not much to explain now. We believe you’ve got the clear idea of planning your next move if you
ever find yourself in such situations. Just remember, owning a stock when an acquisition announcement
hits is a great thing and so is leaving and collect your gains.
It is your decision. You can do what situation demands. Just don’t forget to consider your options.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.