How does acquisition affect stock price

After a merger is complete, the new company will likely undergo certain noticeable leadership changes. Concessions are usually made during merger negotiations, and a shuffling of executives and board members in the new company often results.

A deal may be known as a "merger of equals" if both companies benefit to the same degree, and willingly enter into the arrangement. Securities and Exchange Commission. Accessed July 12, Investing Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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Your Practice. Popular Courses. Some of the companies also opt for the merger and acquisition so that they can diversify their product portfolio and expand the horizons. Two different companies with different product lineage can merge and expand their product lineups.

Another major reason is also the cut back of the costs. If two companies are in the same line of the field then mergers or acquisitions will allow them to cut back on the costs significantly and help improve the profit range for them. Merger and acquisition have quite an impact on stock prices and the stock market.

The major onus is how the market reacts to the news of the merger and acquisition. Sometime it may be favourable while sometime it may tread on the line of unfavourable. In the case of acquisition, the typical theme is that the stock prices of the company which is about to be acquired generally increases in the short term and the share price of the acquirer company decline in the short run. Whenever an acquisition occurs, the acquirer company tends to pay the premium for the acquisition.

The reason being that if the acquiring company does not pay a premium then the shareholders of the company to be acquired will not approve the takeover. Public companies can be acquired in several ways; cash, stock-for-stock mergers , or a combination of cash and stock. Cash and Stock - with this offer, the investors in the target company are offered cash and shares by the acquiring company. Stock-for-stock merger - shareholders of the target company will have their shares replaced with shares of stock in the new company.

Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Reverse Mergers. Key Takeaways When one company acquires another, the stock price of the acquiring company tends to dip temporarily, while the stock price of the target company tends to spike.

The acquiring company's share price drops because it often pays a premium for the target company, or incurs debt to finance the acquisition.