Introduction
Mergers and Acquisitions, or M&A, is the combination of two firms through a financial transaction such as a merger, acquisition, tender offer, or consolidation.
Although the phrases mergers and acquisitions are used interchangeably, their meanings differ. An acquisition, as the name indicates, occurs when one company buys (or acquires) another. A merger occurs when two businesses combine (merge) to form a new legal entity under a single corporate banner.
Types of mergers and acquisitions:
M&A deals are fundamentally about providing value to the target firm. Nevertheless, not every merger and acquisition has resulted in success or corporate development. Aside from that, you should consider what you will need to provide rather than focusing just on what your organization will get. For example, if you’ve acquired another firm, you’ll need to devote time and effort to thoroughly understanding the new industry you’re entering. Just like when you launched your first business.
Here’s a breakdown of M&A deals by kind so you can gain a better understanding of the types of transactions your firm may be considering.
What happens in a merger?
Two businesses are behind this, intended to strengthen their market dominance. Fortunately, there are several methods in which these firms might organize mergers based on their relationship:
Horizontal mergers:
Vertical mergers:
Congeneric merger:
Conglomeration:
Shareholders & Stock Price
Shareholders, generally termed as stockholders, are the one owning shares in a particular company. Actually, a share represents a unit of ownership in a company, and the shareholders claim a share of the company’s assets and its earnings. According to the type of shares owned, their rights and responsibilities become either common or preferred shareholders.
Prices of stock reflects the current market value of a company’s share on a stock exchange and represent the sum of money an investor is willing to pay for or sell a share of a company’s stock. The price a person has to pay to acquire one share, or the amount they receive when selling one share.
Effects of M&A on Shareholders of a Company:
Higher Stock Price:
If the target company’s acquisition or merger is announced, its stock price will rise. This is because the acquiring business often makes an offer that is higher than the market price, in order to encourage the target company’s shareholders to sell their stock.
In most cases, the premium they provide is substantial, potentially resulting in an immediate profit for the target’s stockholders.
Cash or Stock-Based Offers
Cash Offer
In a cash purchase, the target firm’s shareholders receive cash in exchange for their shares. They have no further interest in the target company after the transaction is completed. Typically, stockholders get a sum of money higher than the prevailing market price of the stock before the acquisition.
Stock-based offers
In the case of the stock-for-stock deal, the shareholders of the target company receive stocks of the acquiring company in lieu of cash. The values of these stocks may vary. What may be developed later by the formed entity post this combination may become the determining factor for the outcome at the end, for the shareholders.
Potential Risks
The transaction may fail because of regulatory issues or it may simply fail because the offer price is less tempting than expected. Target companies shares may fall to its level before to the announcement of the entire deal, or even lower, if the acquisition has an adverse effect on its shareholders.
2. Shareholders of the Acquiring Company:
Short-term Stock Price Decline: In general, shareholders of the acquiring business see a short-term drop in stock price following the announcement of the merger.
This happen due to:
Overpayment: The acquiring business may be overpaying for the target firm, hence such a merger is reason for concern.
additional stock issue to support the purchase or additional loans may have a reducing effect on the value of existing equity.
There is uncertainty about the acquiring business’s ability to seamlessly integrate the target firm, resulting in unity and growth.
Long-term Consequence: If such an acquisition or merger is effective, provides synergies, and helps to profitability, the acquirer’s stock price should return and even recover to pre-deal levels, benefiting the shareholder. If the combination fails to meet expectations or causes additional integration issues, share prices are likely to fall further.
3. Overall Impact on Stock Prices:
Synergies: One of the primary motivations of M&A is synergies, which might include cost reductions, greater market share, new product lines, or operational improvements that can boost the combined profitability of both companies. Thus, if and only if investors feel that the merger will result in considerable synergies, the stock values of both the acquiring and target firms are projected to grow over time.
Market Sentiment: Investor perceptions will have a considerable influence on this process. If investors are optimistic about the merger’s strategic justification and perceive huge opportunities for development in the probable future, both businesses’ stock values may skyrocket. On the other side, if investors lose trust in the overall fit and are uneasy with the financial hardship created by
4. Mergers and Shareholder Impact
Stock Swapping in Mergers:
In this sort of transaction, as in other mergers, shareholders of the merging company are primarily issued a piece of the newly formed firm’s stock. When the market believes that the merger will result in a stronger, more competitive firm, stock prices may rise to benefit shareholders. However, if investors are not satisfied, the newly amalgamated company’s stock may disappoint.
Variance of Voting Power:
Shareholding may also be decided by the merger’s voting power provisions. In certain cases, the acquiring business issues additional shares to obtain cash for the purchase, which results in an increase in the interests of current owners.
5. Issues of Dilution and Debt:
Equity Dilution: If the acquiring individual finances his or her takeover by issuing additional shares, the current shareholders’ portion of the company’s capital will be diluted, which may cause the acquirer’s stock price to fall.
Debt Financing: If an acquisition is fully leveraged with debt–as is common in LBOs–leverage increases the level of financial risk on the part of the acquiring firm, raising concerns about its ability to service the additional debt, which may have an impact on the acquirer’s stock price.
Conclusion