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Mergers and acquisitions not only change the course of the companies involved, but can also shake up the value of their shares significantly. Have you ever seen a company’s stock price skyrocket after announcing a merger? Or, conversely, how another plummets in the face of uncertainty? This is why this is a key topic for investors looking to make informed decisions in an ever-evolving market. In this article, we’ll explore how these strategic moves affect stocks, what signals to watch for and how you can leverage these opportunities to your advantage.
What are mergers and acquisitions?
Mergers and acquisitions (M&A) are corporate strategies whereby one company merges with or acquires full or partial control of another. Here is a brief explanation of how you can differentiate between them.
- Merger: Two companies combine to form a new entity.
- Acquisition: A company buys another company and absorbs its operations.
Sounds easy, doesn’t it? However, these moves are more complex because they are often aimed at improving efficiency, increasing market share or diversifying revenues.
Types of mergers and acquisitions
Depending on the purpose and structure of the transaction, there are several types of mergers and acquisitions. If they are divided according to productive aspects, they can be classified into two main types:
Horizontal merger
Between companies in the same sector and market, such as two banks merging to consolidate their presence.
A prominent case is the merger between Volkswagen and Porsche in 2012. Both companies operated in the automotive industry and shared certain market segments, especially in the sports and luxury car category. With this merger, Volkswagen consolidated its position in the premium sector, while Porsche benefited from the infrastructure and resources of the Volkswagen Group.
Vertical merger
It occurs between companies in different links of the production chain, such as an automobile manufacturer acquiring an auto parts company.
The 2019 acquisition of Tesla and Maxwell Technologies is a representative case in point. Maxwell was a supplier of battery technology, and Tesla, by buying it, secured access to key innovation in energy storage. This allowed it to improve its supply chain and optimize the production of batteries for its electric vehicles.
On the other hand, depending on their legal nature, we can find:
Conglomerate merger
It occurs between companies in different sectors, with the objective of diversifying investments.
A relevant case is the merger between Amazon and Whole Foods in 2017. Amazon, an e-commerce giant, acquired Whole Foods, a supermarket chain, allowing it to enter the fresh food sector and strengthen its omnichannel distribution strategy.
Pure Fusion
This occurs when two companies of similar size and power combine to form a new entity. In this case, neither absorbs the other, but instead creates a company with its own identity. An example is the merger of Daimler-Benz and Chrysler in 1998 to form DaimlerChrysler. Although the merger was eventually unsuccessful, at the time it represented the union of two companies with common goals without one dominating the other.
Merger by Acquisition
It occurs when a company buys another company and integrates it into its structure, absorbing it completely. An example is Facebook’s (Meta) purchase of Instagram in 2012. Instagram continued to operate as an independent brand, but under the full control of Facebook, which allowed the company to expand its dominance in social networks.
Each type of merger has a different impact on the value of the shares.
How does a merger or acquisition affect the share price?
The impact of a merger or acquisition on the value of shares depends on several factors:
1. Effect on the price of the acquired company.
When a company is acquired, its stock usually increases in price because the buyer generally pays a premium over its market value. For example, if a company is trading at $50 per share and a buyout is offered at $65 per share, the price quickly rises toward the offer.
2. Price impact of the acquiring corporation
The acquiring entity may see its value affected in different ways:
- If the acquisition generates clear synergies and improves profitability, its share price may rise.
- If it is perceived that the cost of the purchase is too high or that there are difficulties in integration, the shares may fall.
3. Market reaction
Market sentiment plays a crucial role. If investors believe that the merger is positive, the stock may gain value. However, if the deal is seen or perceived as risky and unnecessary, there could be massive sell-offs.
4. Impact on the sector
A major merger can generate movements in companies in the same sector. For example, if two large supermarket chains merge, other competing companies could see their shares affected.
Factors affecting the impact of a merger or acquisition
To evaluate whether a merger or acquisition will be positive for the value of the shares, the following elements should be considered:
- Price paid: If the buying company pays a price premium, it could affect its profitability.
- Financing strategy: If the acquisition is made with debt, financing costs may impact the company.
- Expected synergies: The ability to efficiently integrate both companies is key.
- Regulations: In some cases, authorities may block the merger if it affects competition.
Real case of impact on shares after acquisitions
To better understand how these operations affect, let’s look at the example of:
Disney and 21st Century Fox.
When Disney announced the purchase of 21st Century Fox in 2017 for $71.3 billion, Fox shares immediately jumped 6%. On the other hand, Disney’s shares were down 2% initially due to concerns about the high cost of the deal. However, following the integration and the success of Disney+, its market value increased significantly.
Acquisition of Alsea from Vips (Mexico, 2014)
In 2014, Alsea, the Mexican restaurant industry giant, acquired the Vips restaurant chain from Walmart de México y Centroamérica for approximately Ps. 8.2 billion. This purchase allowed Alsea to strengthen its presence in the casual dining segment, adding more than 360 restaurants to its portfolio, which already included brands such as Starbucks, Domino’s Pizza and Burger King.
Impact on Alsea shares
- Revenue growth: By integrating Vips, Alsea increased its cash flow and diversified its revenues, attracting more investors.
- Increase in the company’s valuation: The acquisition generated expectations of expansion and operating efficiency, which boosted the company’s share price on the Mexican Stock Exchange (BMV).
- Increased debt and financial pressure: Although the purchase was strategic, Alsea had to assume a significant financial burden, which generated volatility in its price in the short term.
This case demonstrates how an acquisition can transform a company, but also create financial challenges that impact its market value.
Mergers and acquisitions advice for investors
If you are an investor and want to take advantage of these opportunities, consider the following:
- Evaluate the acquisition premium: If a company’s shares have risen too quickly after an offer, the value may already be discounted.
- Review the financial fundamentals: Not all mergers generate long-term profits. This must be aligned with your financial objectives.
- Watch the market reaction: If the stock of the buying company falls too much, it could be a good buying opportunity.
- Consider regulation: If there is a risk that the merger will not be approved, the stock may be volatile.
Mergers and acquisitions
Mergers and acquisitions are strategic moves that can generate great opportunities, but also risks for investors. Understanding how they affect stock values will allow you to make informed decisions and leverage market changes in your favor. However, analyzing these events and their impact is not always easy.
At Algo Global, we have investment experts who will guide you to identify the best opportunities and design a solid strategy for your portfolio. Don’t let uncertainty stop you; with the support of professionals, you can make every market movement work in your favor. Contact us today and take your investments to the next level.
