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Mergers & Acquisitions (M&A) are an essential part of any nation’s business environment. A merger happens when two business entities decide to unite or merge into one. An acquisition or what is sometimes also called as a takeover when one business organization buys out another. How does this business activity affect a common investor or more specifically how does M&A affect stock prices? M&A is a corporate strategy aimed at consolidation in the market. Stock markets react differently to every particular M&A activity. One might see a spike in the stock price of the company being acquired, the reason being the premium offered to shareholders in order to get their approval for the acquisition. Sometimes when the target company has been running under loss, this is a good way for its stockholders to recover some of their investments.The acquiring company’s stock may fall a bit as in order to pay the premium, it may have to dip into its cash reserves or use a large debt. There are other related factors at play here. The acquiring company’s investors may feel that the premium being paid is too high or they may be concerned about the debt being raised. On the other hand if the M&A happens smoothly the investor can get handsome returns in the near future. All such factors affect the stock price of the company.
An investor in either of the two companies involved has to factor in all the information surrounding an M&A activity. He/she has to take into account both the long term and the short term gains involved. If the merger or takeover is smooth, the investor stands to gain in the long run. Investors are also at risk to lose if they have put in their money in stocks thinking of a smooth acquisition which eventually does not happen. Investors in the target company may also lose money if the process does not end in the desired result. M&A affects stock prices whether the activity is fruitful or not. M&A depends not only on the willingness of the two parties involved or on the price being offered to the target company. There is always a fear of some differences creeping up during the negotiation stages. An investor can only hope that the differences are not irreconcilable. A lot of other socio-economic factors also have an impact on it. Sometimes the domestic environment of the area of operations of the business may not be conducive to such an activity. The economic backdrop of the country also plays a role in it.Stock market watchers also watch such deals closely. An increase in such an activity points at a bullish market meaning and the investor reacts positively by pumping money in the market. The complexities surrounding M&A makes the role of lawyers all the more important. There are specialist M&A law firms which are hired by the companies for the smooth execution of M&A process. India has also seen its fair share of M&A deals, some notable ones being the Vodafone-Hutchison Essar deal and Flipkart’s acquisition of Myntra. When the deal happens smoothly, the M&A firms in India involved in the process also stand to gain from it. A good law firm can help the entities involved to move towards the successful culmination of the M&A process in a phased and systematic manner. Conclusion M&A is an activity intrinsic to a vibrant and robust economy but its success hinges on various factors. M&A affects stock prices of the companies involved but it also affects the most important piece of the jigsaw puzzle called stock market-the small shareholder.
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AuthorAmy Jones is a professional legal expert working with Ahlawat & Associates. With a long background of taking up several types of cases, she is able to provide the right legal consultation to their clients in a professional manner and help them to solve their complicated legal problems. she keeps writing about different legal matters. Please follow her on Facebook & Twitter to get her latest updates. Archives
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