You woke up one morning to see your favourite company trending on X, and the headlines screamed, “Company XYZ to be acquired in $5 billion deal!” Next thing you know, the stock price is soaring like it just got a big payout.
In this blog, I’ll walk you through exactly how mergers and acquisitions affect stock prices using relatable explanations.
What Are Mergers and Acquisitions?
A merger happens when two companies of similar size agree to combine into a single new entity. Think of it like two friends starting a joint business.
An acquisition, on the other hand, occurs when one company buys another, typically by paying cash or exchanging shares. It’s more like one friend buying the other’s business.
Companies go down this route for many reasons: to expand into new markets, cut down competition, boost profits, or simply survive tough times. And once the news hits the market? Stock prices react fast.
Why Merger and Acquisition News Makes Stock Prices Move
Whenever news drops that one company is merging with or acquiring another, stock prices often react immediately, sometimes in a good way, and sometimes not.
That’s because stock prices aren’t just based on numbers; they reflect investor expectations. So when investors hear about an M&A deal, they start thinking:
- Will this make the company more profitable?
- Is someone overpaying?
- Will this benefit shareholders?
Depending on how confident people feel about the deal, stock prices can either rise or fall. Now, let’s break down what happens to both companies involved, the one being acquired and the one doing the acquiring.
What Happens to the Stock of the Company Being Acquired?
The Target Company’s Stock Usually Goes Up
If a company is being acquired, investors typically get excited, and for good reason. The acquiring company often offers to buy the shares at a higher price than they’re currently worth. That extra money is called a premium.
Here’s an example to make it clear:
Imagine Company A’s shares are trading at ₦200. Then Company B steps in and offers to buy Company A at ₦250 per share. That’s a sweet ₦50 difference. Investors will rush to buy Company A’s shares, hoping to earn that profit. This rush drives the stock price up, closer to ₦250.
What This Means for You
If you’re holding shares in a company that’s about to be acquired, you could see a nice bump in your portfolio value especially if the offer price is high.
What Happens to the Acquiring Company’s Stock?
The Acquirer’s Stock Can Go Up or Down
The company doing the buying doesn’t always get applause from investors. In fact, their stock price might even fall. This is because investors start asking tough questions:
- Is the company paying too much?
- Are they borrowing heavily to fund the deal?
- Does this deal actually make sense?
If the answers don’t sound promising, the stock could take a hit. But if the deal looks smart and profitable in the long run, the stock might go up instead.
What This Means for You
If you own shares in a company that’s making a big acquisition, don’t panic immediately. Look at the details of the deal. Does it help the company grow or solve a problem? If yes, it might pay off in the long term.
What if the Deal Falls Apart?
When a Merger Fails, Stocks Can Drop. Not every merger or acquisition goes through. Sometimes regulators block the deal, or the companies change their minds. And when that happens, stock prices, especially for the company being acquired, can drop.
How Should You Respond as an Investor?
Depending on your investing style, here’s how to approach M&A news:
1. If You’re a Short-Term Investor:
You might try to jump in early on the target company’s stock to benefit from the price surge. But this strategy is risky, especially if the deal is still uncertain.
2. If You’re a Long-Term Investor:
Focus on the fundamentals. Ask yourself:
- Will this acquisition help the company grow?
- Does it make sense in the industry?
- Will the combined company be stronger?
- If yes, it might be worth holding or even adding more shares.
Conclusion
Mergers and acquisitions can shake up stock prices like a whirlwind, sending some shares flying and others crashing. For the company being acquired, it’s often a payday. For the company doing the buying, it’s a gamble.
But if you understand the logic behind these moves, you’re no longer just reacting, you’re investing smarter.
And that’s what we’re all about at Trove. Whether you’re buying global stocks, diversifying with ETFs, or just learning how markets work, we’ve got your back with tools, guides, and real-time market insights.
