By Jack Naudi, Content Strategist and Blog Contributor
Few things are more intriguing on Wall Street than a big merger or acquisition. Following a big lull as a result of the financial crisis, things are picking up. In recent weeks, we’ve seen a few deals involving some heavy hitters: Dell Inc. (DELL: NASDAQ), H.J. Heinz Co. (HNZ: NYSE), Office Depot Inc. (ODP: NYSE), OfficeMax Inc. (OMX: NYSE), AMR Corp. (AAMRQ: OTCQB) and US Airways Group Inc. (LCC: NYSE).
These six companies are involved one way or another in mega deals that are likely to have big impacts on shareholders, and perhaps on the market as a whole. One deal is a leveraged buyout (Dell), one is a flat-out purchase (Heinz) and two others are mergers of two companies into one (American and U.S. Air; Office Depot and Office Max). For traders and investors, three big questions come to mind:
- Is it possible to spot such deals ahead of time and take advantage of any run-up in stock price?
- What happens to shareholders of companies involved in these takeovers and deals?
- What do these buyouts, mergers and acquisitions (M&A) mean for the stock market?
I’ll answer each fairly briefly, and probably not fully. There are books dissecting each of those questions.
Predicting Mergers and Acquisitions
If you have a fool-proof way of detecting a deal before it happens – without violating insider trading rules – I’d like to know. But here are few things to keep in mind:
- Most mergers and acquisitions involve small companies.
- Takeover and acquisition candidates typically have large amounts of cash and solid profitability, but recent lackluster performance.
- Mergers often involve a strong competitor gobbling up a weaker one.
If you hold shares of a company being acquired you can expect an almost immediate increase in the price of the stock. In theory, the stock price should move right to the acquisition price and stay there. However, the announced price and final price can differ – so typically there is some difference.
One study conducted by Ohio State University researchers looked at 362 company acquisitions between 1981 and 1995 and found that 140 offers were revised upward. Fifteen deals didn’t go through. No offers were revised downward.
Merger and Acquisition Affect on Stock Market
In general, it’s a positive sign for the economy when M&A activity ramps up. Heavy merger and acquisition activity can spur market-moving trading activity from traders looking to spot other potential deals. In addition, investors and companies behind the mergers and acquisitions have to feel pretty confident about the future. One word of caution though: Confidence in the economy does not necessarily translate to stock markets. Stocks can fall even in a strong economy.
What fundamental or technical indicators do you look at to help you find companies that might be acquired or merged with another?
Also of Interest:
Jack Naudi is a content strategist at Scottrade. As a blogger, he works to demystify the markets and the economy for all types of investors and traders.
The information presented in this blog is for education purposes only and should not be considered an endorsement of a particular product(s), investment(s) or account(s).