Consequences of Mergers and Acquisitions in The Stock Market

Mergers and acquisitions

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Mergers and acquisitions happen every day, it’s a way for a company to get together with another to become one.There are many reasons for a company to request a merge.

I’m going to share a few with you and also tell you how mergers and acquisitions can affect your portfolio.

Most firms today have a couple of competitors they have to compete with. They may not want to do that, but they have no choice because if they don’t they will run out of business.

There are many paths a company or firm can take to help competing with its competitors. The method that is being used so much to alleviate the pressure exerts by one competitor to another is offering lower prices.

For example, Wal-Mart is a company that tries to do that, and this company has done it and is still doing it perfectly. Unfortunately, many firms are not able to sell their goods or services at a lower rate like Wal-mart is doing. If they do they would most likely end up with some huge losses. This is where the use of merger comes into play.

What are mergers and acquisitions? A company is said to have merged is when it is combined with another to become one in order to survive. It is not something they do by choice because many business owners would rather run his or her business alone than with someone else.

But once they feel that it is too much for them to keep going, they merge instead of running out of business. That is the right decision; once two firms have been merged they become stronger as a unit. They can produce more products, they have a better management system, and they can even make more money. The most important of all is that once two firms are merged they can sustain the pressure of their competitors.

Why do companies merge?

Christina Tangora Schlachter and Terry H. Hildebrandt, MA, MA, PCC from dummies.com give six good reasons why a company would choose to merge.

  1. To increase capabilities
  2. Gaining a competitive advantage or larger market share
  3. Diversifying products or services
  4. Replacing leadership
  5. Cutting costs
  6. Surviving

Out of these six reasons, surviving is one reason that caused so many companies to merge with others.

How do mergers and acquisitions affect stock traders?

I know that’s the answer you’ve been waiting for. Mergers and acquisitions in the stock market sometimes work in our favor. But they don’t always produce the same result which could’ve been wonderful to us.

When two firms are merged there’s usually a spike in the volume of their stock. That’s why it could be in our advantage when we buy shares from them. Since demands tend to increase prices, two merged firms would tend to increase in price as result.

Isn’t that wonderful? We all would like to own shares from a company and watch the price skyrocketed in a short period of time. That would make our day for sure.

Here’s an example taken from CNN Money.

The Walt Disney Company (DIS) bought out Marvel Entertainment, Inc. (MVL) in a deal valued at $4 billion in 2009. The purchase price was originally a mix of $30 in cash and .745 of a share of Disney for each share of Marvel. The closing prices at the time of the deal meant that Marvel shareholders would have received $49.3998 per share in value for their stock at closing. However, prior to the merger’s completion the share price of Marvel Entertainment, Inc was only $48.37.

This shows that prior to the merger MVL worth less that it did after the merger. That’s exactly what I was trying to tell you from the previous paragraph.

Mergers and acquisitions make companies worth more than they previously did. It makes perfect sense because if it wasn’t the case companies would not merge with others. There’d be no point in doing so.

Now that you know the effect of mergers and acquisitions on your shares you can feel more at peace the next time your stock has undergone a merge.

I know that a merger may not work the way we expect it to work every time. You should also know that too.

With that being said, there are some questions you should ask yourself first if you’re going to buy shares from a company that has just been merged or if you already own shares in a company that has been acquired.

First question to ask:

What caused the merged? Knowing the reasons for the merging of two firms can greatly help a potential investor or a stockholder.

Most mergers and acquisitions take place to make both companies stronger. Unfortunately, when mergers and acquisitions do take place the incoming companies come with their packages.

If they did not have those packages there wouldn’t be any need for them to merge. Most of the times, the companies that acquire the others are usually stable enough to take care of those packages.

Sadly, some companies are not able to respond to all the obstacles brought within a merger. That’s where an investor may find some troubles with his or her investment.

Second question to ask:

How will your shares change after the merger? It would most likely go one way, fewer shares. If the company you’re currently own shares in is the one that’s being acquired by the other one, you might have to sell off your shares before this event takes place.

If not, your number of shares may decrease drastically. This is not something you would wish for, but it does happen in the event of mergers and acquisitions.

To conclude

Mergers and acquisitions happen all the time. Us stock traders usually feel that we’re part of those events; in fact we are.

Therefore we have to know why does a merger is taking place and when will it be in effect when we own shares in a company.

Mergers and acquisitions are always in the best interest of the companies, but they don’t always work for us the way we’d like them to.

Know your facts about the market and never stop educating yourself, because you will always find a way to utilize those knowledge of yours as you’re trading.

Have you ever been with a company that were undergoing a merger? How was that experience for you? Please share with us in the comment box bellow!