What happens to the stock prices of two companies involved in an acquisition?

By Investopedia Staff AAA
A:

When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. In general, the acquiring company's stock will fall while the target company's stock will rise.

The reason the target company's stock usually goes up is that the acquiring company typically has to pay a premium for the acquisition: unless the acquiring company offers more per share than the current price of the target company's stock, there is little incentive for the current owners of the target to sell their shares to the takeover company.

The acquiring company's stock usually goes down for a number of reasons. First, as we mentioned above, the acquiring company must pay more than the target company currently is worth to make the deal go through. Beyond that, there are often a number of uncertainties involved with acquisitions. Here are some of the problems the takeover company could face during an acquisition:

  • A turbulent integration process: problems associated with integrating different workplace cultures
  • Lost productivity because of management power struggles
  • Additional debt or expenses that must be incurred to make the purchase
  • Accounting issues that weaken the takeover company's financial position, including restructuring charges and goodwill

We should emphasize that what we've discussed here does not touch on the long-term value of the acquiring company's stock. If an acquisition goes smoothly, it will obviously be good for the acquiring company in the long run.

To learn more about this subject, check out The Basics of Mergers and Acquisitions.

RELATED FAQS

  1. What are the income statement presentation formats and what industries use them?

    Learn about two styles of income statements: the single-step method and multi-step method. Determine which types of businesses ...
  2. What does an income statement look like?

    Learn about the different parts of an income statement and how investors review them carefully to determine the health of ...
  3. When should I use depreciation expense instead of accumulated depreciation?

    Distinguish differences between depreciation expense, which is reported on the income statement, and accumulated depreciation ...
  4. What are the differences between percentage of completion and the completed contract ...

    Learn the advantages and disadvantages businesses face when using either the percentage-of-completion or completed contract ...
RELATED TERMS
  1. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  2. Assisted Merger

    The merger of two or more financial institutions undertaken with ...
  3. Assuming Institution

    A healthy financial institution that purchases the assets of ...
  4. Acquisition

    A corporate action in which a company buys most, if not all, ...
  5. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  6. Working Capital

    This ratio indicates whether a company has enough short term ...
comments powered by Disqus
Related Articles
  1. The Biggest Mergers & Acquisitions In ...
    Investing Basics

    The Biggest Mergers & Acquisitions In ...

  2. How To Profit From Mergers And Acquisitions ...
    Investing Basics

    How To Profit From Mergers And Acquisitions ...

  3. Material Adverse Effect A Warning Sign ...
    Markets

    Material Adverse Effect A Warning Sign ...

  4. War's Influence On Wall Street
    Bonds & Fixed Income

    War's Influence On Wall Street

  5. SEC Filings: Forms You Need To Know
    Investing Basics

    SEC Filings: Forms You Need To Know

Trading Center