Effect of Mergers and Acquisitions on Stock Prices

Mergers and acquisitions (M&As) are strategic corporate moves often undertaken to achieve strategic growth and gain competitive advantages through synergies. It allows companies to enter new markets and achieve economies of scale. Like every major event, M&As also significantly impact the stock prices of both the companies involved.

Let us see what happens in a merger and learn how mergers and acquisitions affect stock prices in the equity market.

What happens in a merger/acquisition?

In a merger or acquisition, two companies combine. Usually, ownership stakes are exchanged in the form of stock, cash, or a combination of both. Let us see how this happens:

Step I: Announcement of the deal

The companies publicly announce the merger or acquisition. They provide all the relevant details like:

• Purchase price
• Compensation structure (cash, stock, or both)
• Strategic rationale

Step II: Regulatory approvals

The transaction is reviewed by regulatory bodies to ensure it complies with applicable laws. In India, the legal framework of mergers and acquisitions is governed by the Companies Act, 2013.

Step III: Shareholder approvals

Shareholders of both companies are required to approve the deal. The proposal must be approved with the consent of at least 75% of the shareholders present and voting.

Step IV: Financing the deal

The acquiring company arranges the necessary funding. Usually, it involves:

• Raising debt
• Issuing new shares
• Using existing cash reserves

Step V: Developing plans for integration

Detailed plans are developed for integrating:

• Operations
• Cultures
• Systems of the two companies

Step VI: Closing the deal

Once all approvals are obtained, the deal is finalised. Ownership stakes are exchanged according to the terms of the agreement. Also, the target company’s stock is usually delisted from stock exchanges. The shareholders of this company receive the agreed-upon compensation (cash or shares of the acquiring company).

Difference between a merger and an acquisition

It is pertinent to note that both “merger” and “acquisition” are forms of corporate restructuring. However, they differ in terms of execution and implications for the companies involved. Let us see the major differences:

How do mergers and acquisitions affect stock prices?

Now that you know what happens during mergers and acquisitions, let us see how this major corporate event impacts the share prices of the companies involved.

I) Volatility during the pre-completion period

It has been commonly observed that stock prices are volatile during the period between:

• Announcement
  and
• Completion of the deal

That is largely because of the uncertainty related to regulatory and shareholder approvals, which can affect the deal's outcome. Furthermore, rapid price fluctuations are also caused due to concerns about the integration process and actual realisation of synergies.

II) Impact on stock prices at the time of the announcement of the merger/acquisition

III) Impact on stock prices after completion of the process

Key takeaways

Mergers and acquisitions (M&As) are corporate restructuring events. They significantly impact the stock prices of both the companies involved in the deal. During the period between the announcement and completion, stock prices are volatile due to uncertainties about approvals and integration success.

At the time of announcement, the target company's stock price increases due to a premium offer, while the acquiring company's stock price fluctuates based on investor perceptions. After the deal, the target company's shares are delisted. The stock price of the acquiring company depends on the success of integration and the realisation of synergies.

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