Common Reasons for Poor Performance in Stocks during Merging Period

Any investor is concerned about what affects the market value of his shares. Mergers and acquisitions among securities issuers are such factors. Therefore, they must be understood and taken into account not only not to lose but also to earn money from it.

The impact of mergers and acquisitions on the value of company shares

Mergers and acquisitions (M&A) have a significant impact on the activities of the companies involved in them and, consequently, on the value of the securities of these companies. The basis of M&A deals is always the competitive environment or its changes. They become more significant and rapid as the economy develops. Globalization, diversification, technological progress, market liberalization – each of these factors constantly affects the assessment of the company’s assets and forecasts of its functioning. Waves of M&A deals are connected, one way or another, with these factors. The peaks of mergers and acquisitions fall during periods of structural changes, industrial crises, booms, inflation, and technological revolutions when there is a significant organizational restructuring of the economy and the revaluation of its assets.

In addition, a significant number of the company’s shares belong to investors who do not seek to receive short-term benefits from the current situation but are the so-called. Buy and hold by investors who are interested in obtaining high long-term returns. When choosing an investment object, it is important for such shareholders to understand the factors that determine the long-term dynamics of companies’ profitability.

When information about an M&A transaction is made public, the current quotations of securities of companies participating in the upcoming procedure usually change in price in the following way:

  • the assets of the acquired company rise in cost;
  • the assets of the absorbing company become cheaper.

The growth of the former is because the shareholders of the acquired company are offered a fairly favorable exchange for the shares of the merged company. The decline in the absorber’s quotes is because it will face considerable costs for the reorganization. After that, the price, as a rule, begins to grow (if the goals of such a business restructuring are achieved).

Reasons for poor performance on stocks during merging

The fall in the value of shares of listed companies, in addition to the negative impact on the value of investor portfolios, may affect the strategy of organizations, potential M&A, and the possibility of raising equity capital. If a company plans to issue its own shares to raise additional financing for the business, then the low market value of the shares reduces the potential for raising capital in absolute terms and also leads to greater capital dilution for existing shareholders,

There are several explanations for the low value:

  • So, one of the reasons is the reduction of the transaction premium. Compared to the pre-2001 period, when a typical transaction premium was around 30%, in subsequent years, buyers overpaid a little more than 20% to acquire an acquired company, given that shareholders and management of the company do not like excessive overpayments. On average, the amount of overpayment is constantly decreasing.
  • Another reason for the decline in the proportion of transactions that resulted in a decrease in value for the buyer is the market reaction to cash and stock transactions at the time of the announcement. On average, the buyer overpays 49% in transactions for cash, while in transactions with settlement through own shares – 69%- the difference has not changed much since 1997.

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