What Happens To Stock When Company Is Acquired?
When a company is acquired by another, it can mean both positive and negative news for the stock of the acquired company. Depending on whether or not the terms of the agreement are perceived to be beneficial or not, stock prices may rise and fall as a result of the acquisition. Let’s take a look at some of the major factors that play a role in stock prices following a company acquisition.
Rumors and Speculations
A common factor which influences stock prices when a company is being acquired is rumors and speculations. Before the public is made aware of the official news, speculation surfaces and leads to a surge in the price of the company’s stocks. Once the news is officially released, the stock prices may again bump up due to the perception whether or not the terms of the acquisition are favourable.
Premium Prices
Premium prices are another factor that play a role in stock prices of a company being acquired. A premium price means that the acquirer is willing to pay an additional amount above the current market value to acquire the company. This is usually done to ensure that shareholders are compensated in an equitable way. When the acquirer offers a premium, the stockholders usually reap the benefits.
Employee Retention
Employee retention is an important factor to consider when a company is being acquired. Typically, when a big corporation has acquired a smaller one, some of the employees of the acquired company are retained. This may have a direct effect on current and potential employees of the company as to whether or not they should stay or go. This uncertainty can affect the stock prices as well.
Mergers and Takeovers
Mergers and takeovers can also have an effect on stock prices of the company being acquired. A merger is when two companies join forces and become a single entity, while a takeover is when one company purchases the majority stake in another company. Both have a significant impact on the stock prices of the acquired company. On the one hand, if the newly merged or taken over entity is viewed as a successful and profitable organization, stock prices may go up. However, in some cases, the company’s stock prices may drop as it is viewed as being at a disadvantage in comparison to its competitors.
Political and Social Factors
Political and social factors can also influence stock prices of a company being acquired. For example, if the acquirer is a foreign company, there may be political pressure to limit or prohibit foreign investment. On the other hand, local companies may be eligible for tax incentives in certain circumstances. Simultaneously, social factors such as consumer sentiment and public opinion about the acquisition may have an effect on stock prices.
Change in Management
When a company is being acquired, it is common for the acquirer to appoint new management in order to better suit the needs of the new organization. A change in management can also have a direct effect on stock prices. If the new management is seen as efficient and competent, it may lead to an increase in stock prices as investors view the company in a positive light. However, if the new management team is viewed as inexperienced or incompetent, the company’s stock prices may fall.
Tax Implications for Stockholders
When a company is being acquired, the tax implications for stockholders should also be taken into consideration. Different countries have different tax laws, so it’s important to take a close look at the local tax laws in order to determine the exact tax impact on stockholders. In some cases, stockholders may be eligible for a capital gains tax break, which can lead to a rise in stock prices.
Deal Structure
The structure of the deal is also an important factor when it comes to stock prices. Some deals involve the acquirer paying a lump-sum or cash payment to acquire the company, while others involve a stock swap. Depending on the terms of the deal and its perceived value, stock prices may rise and fall accordingly.
Market Conditions
Finally, market conditions also play a large role when it comes to stock prices following a company acquisition. If stock prices happen to be rising in the market, the acquisition may provide additional momentum and lead to a sharp rise in stocks. Similarly, if stock prices are falling, it may have a cascading effect on the stock of the company being acquired.
