Mergers and acquisitions are a fact of life in financial markets. More importantly, deal-making can affect the shares of both the acquired company and the company doing the buying. Additionally, there are different ways companies can acquire each other, meaning varying sets of outcomes for investors in the acquired company. Here is what investors need to know.
Immediate Price Action
In many acquisitions, the acquiring company is offering a premium to compel the takeover target to sell. For example, an acquiring company tells its target it wants to buy it for $60 when the target is trading around $50. That is a 20 percent premium. Upon announcement of the deal, traders will likely push the target close to $60 on the assumption that the deal will be completed at that price.
How Public Companies Are Acquired
There are several ways in which public companies are acquired. Perhaps the most straight forward way is for cash. An acquiring company may offer $1 billion in cash for a target, which could work out to $60 a share. In that case, when the deal is done, the target company's shareholders receive $60 for each of their shares. Companies also use stock to make acquisitions. Usually, a larger company acquires a smaller rival and offer shares to get the deal done. When larger companies buy smaller firms, the share exchange is rarely one-for-one. Investors in the targeted firm will be offered shares of the purchasing company in proportion to their existing stakes. For example, an acquiring company might say it is offering half of one its shares to acquire each share of a target company. That means the target company's investors get half a share of the acquiring company for each one of their shares.
Other Types Of Buyouts
There are other ways companies acquire each other, including a stock and cash transaction. In this scenario, investors in the acquired company will be offered both cash and shares in the purchasing company. In this case, the acquiring company would give the targeted company's shareholders $30 a share in cash and $30 worth of the acquiring company's shares. Additionally, companies can be acquired through leveraged buyouts. This is when the acquiring firm uses debt to finance its purchase of the target. Under this scenario, shareholders of the acquired company are usually offered cash for their shares.
Usually One Outcome
Assuming all goes well from the time the deal is announced until it closes, the shares of the acquired company will usually trade close to the offer price. Once the deal is completed, the stock disappears as the acquired company is folded into the purchasing firm and investors either take cash or become shareholders in the firm that executed the acquisition.
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