Effect of Mergers and Acquisitions on Stock Markets
Investing in Stock markets involves a very high amount of risk, the values of shares depend on many factors like government policies, natural calamities, company's quarter results, balance sheets etc. One such factor is Merger and Acquisition of companies. What happens in Stock markets when one company merges with another, we will discuss that here. Let us start with understanding mergers and acquisitions.
There is one motive common for every Business Firm and that is to maximize profit and minimize losses. To achieve this objective companies make many strategies and do lots of planning. One such Strategy is to offer new products by expanding or enlarging the production capacity. Alternatively companies can also grow externally by acquiring existing business firms, and this is called Merger, Acquisition, Amalgamation, Takeover, Absorption, Consolidation etc.
When any company plans for internal growth it has advantages of choosing equipment, technology, location etc. according to their own decisions. And the disadvantages of choosing internal growth are longer implementation period, greater uncertainties, lack of funds etc.
However, choosing the external growth path i.e. mergers and acquisition strategy is also not so easy because first of all, all the costs incurred and benefits accrued are not quantifiable and secondly, there are lots of accounting, taxes and legal issues which are more complex then acquiring machinery.
Types of Mergers
1) Horizontal Mergers - A company merger is called horizontal merger when a deal takes place between two or more corporate firms dealing in similar line of activity. The motive behind horizontal mergers can be elimination or reduction in competition, putting an end to price cutting, economies of scale in production, research and development, marketing etc.
2) Vertical Mergers - A merger is called vertical merger when any company acquires or deals with 'upstream' or 'downstream' firms. Upstream firms are the ones which are distributors of final product of former company and Downstream firms are their suppliers. Motive behind vertical mergers are to get control over supply and/or distribution cost, guarantee assured supply of goods or services, create entry barriers for potential new entrants etc.
3) Conglomerate Mergers - A merger is called conglomerate merger when a firm established in one Industry type combines with another firm in another unrelated Industry. Motive could be diversification.
So, this was the basic introductory knowledge of mergers and acquisitions. Now what effect takes place in Stock markets and Stock values (of participant companies) when a firm merges with another firm. The first advantage is that a post-merger firm, being larger in size is likely to raise finances at cheaper/lower rates then at the situation before merger. The reason behind this is that investors consider their funds secured, minimizing financial risks involved.
Thus, the final effect is that the share value increases after merger. Now, merged company becomes more powerful and promising as it has positive aspects of both (or more) companies and it restores trust. As a result demand of its share increases.
There is one motive common for every Business Firm and that is to maximize profit and minimize losses. To achieve this objective companies make many strategies and do lots of planning. One such Strategy is to offer new products by expanding or enlarging the production capacity. Alternatively companies can also grow externally by acquiring existing business firms, and this is called Merger, Acquisition, Amalgamation, Takeover, Absorption, Consolidation etc.
When any company plans for internal growth it has advantages of choosing equipment, technology, location etc. according to their own decisions. And the disadvantages of choosing internal growth are longer implementation period, greater uncertainties, lack of funds etc.
However, choosing the external growth path i.e. mergers and acquisition strategy is also not so easy because first of all, all the costs incurred and benefits accrued are not quantifiable and secondly, there are lots of accounting, taxes and legal issues which are more complex then acquiring machinery.
Types of Mergers
1) Horizontal Mergers - A company merger is called horizontal merger when a deal takes place between two or more corporate firms dealing in similar line of activity. The motive behind horizontal mergers can be elimination or reduction in competition, putting an end to price cutting, economies of scale in production, research and development, marketing etc.
2) Vertical Mergers - A merger is called vertical merger when any company acquires or deals with 'upstream' or 'downstream' firms. Upstream firms are the ones which are distributors of final product of former company and Downstream firms are their suppliers. Motive behind vertical mergers are to get control over supply and/or distribution cost, guarantee assured supply of goods or services, create entry barriers for potential new entrants etc.
3) Conglomerate Mergers - A merger is called conglomerate merger when a firm established in one Industry type combines with another firm in another unrelated Industry. Motive could be diversification.
So, this was the basic introductory knowledge of mergers and acquisitions. Now what effect takes place in Stock markets and Stock values (of participant companies) when a firm merges with another firm. The first advantage is that a post-merger firm, being larger in size is likely to raise finances at cheaper/lower rates then at the situation before merger. The reason behind this is that investors consider their funds secured, minimizing financial risks involved.
Thus, the final effect is that the share value increases after merger. Now, merged company becomes more powerful and promising as it has positive aspects of both (or more) companies and it restores trust. As a result demand of its share increases.
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