Value of Share of Merged Firm

The firms which undergo merger and acquisition will have drastic change in price of their share due to various reasons. If the market feels that the acquisition will bring in more business and profit to the company the share price moves up, else moves down. In this case there are two firms whose share price has to be considered. The first one who takes acquires another company, the second one which is being acquired. The primary reason for such a drastic change in price being the change in the capital value of the organization once the process of acquisition takes place. It is usually said that markets are the best entity to decide rate the merger and acquisition process.

The following effect takes place on the price of the shares after or before the acquisition

• The share price of the company which is about to be acquired usually goes up. It is off the opinion that the acquired company will have a huge inflow of funds due to the acquisition process. The acquiring company has to pay premium for the acquisition process which is an inflow to the acquired company.
• The share price of the company which is about to acquire another company will usually go down. The first reason being the cash outflow from the company that acquires another company. The probability of the acquisition failing are more. There may be valuation error by the take over company evaluating the asset worth of the acquiring company. Some of the problem that a takeover company can face are listed below
  • The problem in coping up with different organization cultures prevailing in the acquiring company by the takeover management.
  • Power struggle in the acquired company this will have impact in the productivity of the company.
  • Additional debt or expense that the company might incur due to the acquisition process.

The above change in the share price need not be same in all the case. There might be some exceptional case. There will be a huge impact on the share price of both the companies.

Question

• What is the influence of the merger on acquired company?
• What is the influence of the merger on takeover company?