Why Do Companies Do M&A?

IBM, on the other hand, was once the world’s largest information technology corporation. When Amazon, Google, and Microsoft stepped up their rivalry, the company’s star waned. It has become a shell of its former glory in recent years.

Why Do Companies Do M&A?

M&A is carried out by businesses for a variety of reasons.

Purchasing a Competitor

First, they purchase businesses with the intention of purchasing a rival. What Google and Facebook have done is a wonderful illustration of this.

For almost a billion dollars, Google bought YouTube. YouTube is now valued at over $200 billion. Similarly, Facebook paid approximately a billion dollars for Instagram, which is now worth more than $100 billion.

Make synergy

Second, corporations use mergers and acquisitions to develop synergies. For instance, if one software development business has 5000 employees and another has 4,000, integrating the two companies might result in synergy.

For instance, the merged business may have just 5000 people doing the same job (like United Technologies and Raytheon).

Increase the pace of growth

Third, firms use mergers and acquisitions to boost their expansion. The above-mentioned Facebook example is an excellent one. Facebook has acknowledged that the growth of its legacy platform is slowing. It bought Instagram and WhatsApp to help it expand faster.

It also tried to buy Snapchat before the business went public.

Where can I find out about M&A news?

  • SeekingAlpha
  • CNBC
  • Reuters
  • Bizjournals
  • MarketWatch

The acquisition of Red Hat by IBM is an excellent example of this. Red Hat was trading at $116 at the time of the announcement. It will be purchased by IBM for $190 per share.

As a result, when the market opens, IBM’s stock is anticipated to fall substantially, while Red Hat’s price would likely rise to near $190. This is because IBM has already committed to paying $190 for the shares.

Instead, IBM was dismissed for a variety of reasons:

  • For dilution reasons, investors will desert the stock. They feel the money would have been better spent in another location.
  • IBM’s indebtedness is anticipated to rise as a result of the transaction.
  • Mergers and acquisitions haven’t always turned out as planned. They have, in reality, been value destroyers.
  • The purchase of Monsanto by Bayer is a notable illustration of this. Monsanto lost a key lawsuit shortly after the acquisition was completed, putting the company’s survival in jeopardy.

As a result, the ideal method to trade when a transaction is announced is to go long the firm being bought and short the one doing the acquisition. In reality, this has resulted in the formation of a huge group of investors that specialize in merger arbitrage.

What happens to stocks when a company merges or acquires another company?

The share values of the two firms frequently move in opposing directions in the case of a merger or acquisition. This is normally a one-time occurrence before the operations return to normal.

On the one hand, the purchasing company’s stock drops. This is because the corporation may have spent a significant portion of its funds or perhaps taken on debt that the shareholders believe is excessive.

The stock price of the purchased company, on the other hand, is likely to climb. This occurs when the purchasing business pays a significant sum to the shareholders to induce them to sell.