Are mergers good for a firm's share price?

Question

There is quite a degree of risk with a merge, not all transitions go smooth and some enterprises can end up loosing money if they are not careful. So I understand if this creates uncertainty among stockbrockers.

On average, do share prices go up when a company announces a merger?

Answer 1

It all depends on how the market values the merger. Often, the stock of the company that is being acquired will rise, especially if the company that is taking it over is offering an amount that equates to an increase in the share price. The acquiring company's stock may go up or down -- often down, if it has to spend more than the market thinks it should, or the merger is not viewed as a good business move. Also, if the acquiring company has to issue more stock to make the purchase, this dilutes the stock (by putting more shares on the market), driving the price down.

Answer 2

It depends on what the market thinks about the merger. If the market thinks that merger will create synergy then the stock goes up if not it goes down. For example, the merget between HP and Compaq was seen as a failure and HP's stock tumbled only to recently recover.

Answer 3

Long term research has rarely proved that mergers on the whole add value. Given this empirical evidence it is interesting that mergers & acquisitions remain one of the dominant themes of many board rooms. However its unmistakable that their are some very shrewed buyers out there who have good track records in deal making (ie adding value for shareholders).

I think the UK based bank HSBC is an excellant example - it generally buys 2nd tier poorly performing banks with low valutations, injects its risk and commercial managament into them and makes handsome returns.

Answer 4

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