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A Beginner’s Guide to Mergers & Acquisitions


INTROThe BasicsWhy Companies Merge & AcquireWhat Happens to Stocks in an Acquisition?What Happens to Stocks in a Merger?CONCLUSION



Survival is everyone's primary motivation. People go to work, marry their partners, and acquire new skills.

Companies do business, merge with companies, and acquire other establishments. Why? To be stronger.

But as investors, we’re not looking at this from a micro perspective. We want to know what this means for our stock, right?

Let’s dive into it.

The Basics

Before I talk about details and specific cases, let me clear out the fog.

A merger occurs when two companies combine to form a new, single entity. In this scenario, both companies typically surrender their original stock and issue new stock in the name of the merged entity.

An acquisition, on the other hand, is when one company (the acquirer) buys another (the target) and gains control over it. The target company's stock often ceases to exist, and the acquirer's stock continues to be traded.

Here are a few of the biggest mergers & acquisitions in history.

Are you still here? Great.

Why Companies Merge & Acquire

Why do people marry? Because they love their partner? Sure. But one of the main reasons (on top of love obviously) is added value.

In that same sense, companies are looking for “marriages” that make them better. Here are 10 reasons why companies merge & acquire.

Expansion: M&A can facilitate geographic or market expansion, allowing a company to reach new customers and regions.

Market Share: Acquiring competitors helps in increasing market share, enhancing competitiveness, and potentially reducing pricing pressures.

Diversification: Companies diversify their product or service offerings to reduce risk by entering new industries or sectors.

Synergies: M&A can create cost-saving synergies by eliminating redundancies, streamlining operations, and combining resources.

Economies of Scale: Merging can lead to cost reductions through increased production and distribution efficiencies.

Access to Technology: Acquiring tech companies provides access to valuable intellectual property, patents, and innovations.

Talent Acquisition: Companies often merge to gain access to skilled employees, leadership, and industry expertise.

Eliminating Competition: Eliminating rivals can lead to increased pricing power and reduced competition.

Risk Mitigation: M&A can help diversify risks in volatile industries or economic conditions. Financial Gains: Companies may engage in M&A to boost shareholder value, increase stock prices, or improve financial performance.

What Happens to Stocks in an Acquisition?

Let’s look at this from a recent acquisition example. Microsoft just bought Activision Blizzard for $95 per share.

So, when Microsoft bought Activision Blizzard at $95 per share, here's what happened.

All holders of ATVI received $95.00 in exchange for each ATVI share held at the close of trading on October 12, 2023. And you won't see Activision Blizzard stock trading anymore (because it’s now a part of Microsoft).

Aside from a little volatility in the stock price, nothing changed for Microsoft’s stock.

What Happens to Stocks in a Merger?

I have a very famous example for you - one that Buffett was and is involved in.

When Kraft and Heinz merged, it created a new company called Kraft Heinz.

Existing Kraft shareholders received shares in the new company, while Heinz shareholders

received a cash payment.

Initially, the stock of Kraft Heinz faced some challenges, like cost-cutting efforts and changing consumer preferences. As a result, the stock price didn't perform as well as expected.

It’s down 42% in the last decade.


So, this goes to show that not every merger is successful.

M&A that places companies under the control of better owners or managers, or that reduces excess capacity, typically create substantial value for both the

economy as a whole and for shareholders.

Research indicates that value-creating acquisitions generally fit one of the following molds:

  1. Improve the target company's performance.
  2. Consolidate to remove excess capacity from an industry.
  3. Accelerate market access for target's or buyer's products.
  4. Acquire skills or technologies faster or at a lower cost than they can be developed.
  5. Pick winners early and help them develop their businesses.

Be mindful that it's easier for a company to improve the performance of a target company with low margins and low ROIC than it is to improve the performance of a company with high margins and high ROIC.

Also, some M&A may actually destroy value. For example, when acquiring companies overpay and/or when combined cash flow or ROIC doesn't increase compared to standalone levels.

And that’s why you need to pay extra attention when it happens to one of your stocks.

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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.

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