Company mergers: what to know when companies merge

Mergers and acquisitions (M&A) are often shrouded in mystery and chaos. The public can only obtain partial information, and most conspiracies are done behind closed doors. This process may make it difficult for the shareholders of each company that is undergoing a merger or acquisition to know what will happen and how each company’s stock price will be affected. However, there are ways to invest around mergers and benefit from the ups and downs of the process.

Key points

  • Mergers or acquisitions refer to the merger of two companies to form one to take advantage of synergies.
  • A merger usually occurs when a company purchases a certain amount of stock in exchange for another company’s stock in exchange for its own stock.
  • Acquisitions are slightly different and usually do not involve management changes.
  • Usually, the stock price of the acquired company will rise because goodwill is taken into account in the purchase price.
  • Shareholders can vote to decide whether the merger should be carried out.
  • Analyzing the financial statements of the two companies can help determine what the merger might look like.

How it works

A merger occurs when a company finds that it has merged its business operations with another company in a way that helps increase shareholder value. It is similar to an acquisition in many ways, which is why these two actions are often classified as mergers and acquisitions (M&A).

In theory, an equal merger is when two companies convert their respective stocks into stocks in the newly merged company. However, in practice, the two companies generally reach an agreement for one company to purchase the common stock of the other company from its shareholders in exchange for its own common stock. In rare cases, cash or some other form of payment is used to facilitate equity transactions. Usually, the most common arrangement is stock-for-stock.

Mergers are not one-to-one, that is to say, exchanging one share of company A will usually not give you one share of the combined company. Just like a split, the number of new company shares you get in exchange for your shares in company A is represented by a ratio. The actual number may be 1:2.25, and one of the new company shares will cost you 2.25 shares of company A.

In the case of fractional shares, they are processed in one of two ways: fractional automatic cashing, you will get a check on the fractional market value, or the number of shares will be rounded.

Mergers and acquisitions

Although the two processes are similar, don’t confuse mergers and acquisitions. Although in many cases the difference may be more about politics and semantics, there are many blue chip stocks that have made quite a few acquisitions while maintaining relatively low volatility.

As a general rule of thumb, if the leadership of the company in which you hold shares has not changed much, it may be an acquisition. However, if your company undergoes a major reorganization, we will consider a merger more.

Mergers: What to do when companies merge

Understand the acquisition

The buyout situation can also be very important. Investors should understand the nature of the merger, key information involving other companies, the types of benefits that shareholders receive, the company that controls the transaction, and any other relevant financial and non-financial considerations.

Although this may seem counterintuitive, owning the acquired company can be a real windfall for investors. Because if the performance of the acquired company is good and the future prospects are promising, a certain amount of goodwill may be involved.

When investing around a merger, it is important to note that when a merger is announced, the actual closing price usually ends up being different from the announced merger price. This is because mergers are usually not completed according to the terms originally proposed.

Goodwill is usually included in intangible assets, but if these assets are not included in the stock price when you buy the shares of the acquired company, you may end up at the top of the list. Goodwill confuses many people, but in essence, goodwill is the amount that a company pays to purchase it in excess of the book value of another company.

And don’t forget that because intangible assets are not always easy to value, you can expect that a certain percentage of phantom assets in most companies with goodwill on their balance sheets may be overvalued. Although this is not a good deal for individuals who own shares in several acquired companies, if you own the acquired company, this may be another victory for you.

If the company you invest in is underperforming, the merger is still good news. In this case, a merger can often provide a good opportunity for people with underperforming stocks. Understanding the less obvious shareholder interests allows you to make better investment decisions regarding mergers.

Importance and consideration of voting

Remember, the decision of one company to merge with another company is not necessarily set in stone. If you are a shareholder of a company, the decision to merge with another company is partly up to you. The typical voting plan of a listed company usually ends with a shareholder vote on the merger issue.

If your analysis and considerations tell you that the merger is a step in the wrong direction, or if it tells you that this may be a good financial opportunity, then voting with your stock is to exercise your power in the decision-making process The best way.

The right to vote can be exercised at the company’s annual general meeting of shareholders or other specially convened meetings, or an agent can be entrusted to exercise it.

Non-financial considerations are also important when reviewing merger transactions. Remember: this is not necessarily all about money. Perhaps the merger will result in the loss of too many jobs in a depressed area. Maybe another company is a big polluter, or provides funding for political or social activities that you don’t support.

For most investors, the concept of whether a newly formed company can make money for you is certainly a big question, but it may be worth remembering non-financial issues, as they may be important enough to be a deal-breaker.

Analyze financial reports

Although not many people like to read financial statements, it is a good idea to check the key information of each company participating in the merger. If you are not familiar with the company, please review and analyze the company and determine for yourself whether this is a good investment decision. If you find that it is not, then the newly formed company may not be very good either.

When analyzing financial statements, be sure to check the latest financial statements and annual reports of the two companies. Since you last checked your company’s financials, many things may have happened, and new information may be the key to determining what has affected other companies’ interest in the merger.

Understand the changing dynamics of the new company

The new company may have some obvious changes from the original company. One of the most common situations is a change in leadership. Certain concessions are usually made in merger negotiations, and the executives and board members of the new company will change to a certain degree, or at least have plans for future changes. When you vote for the proposed merger, remember that you also agree to the relevant conditions such as leadership changes.

Bottom line

As mentioned earlier, in the final analysis, your vote is yours, and it represents your choice to support or oppose the merger. But remember, as a shareholder of the relevant company, your decisions should reflect the best interests of yourself, the company, and the outside world. With the correct information and relevant considerations of facts, it may be a realistic goal to stand out in front of the merger.


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