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What happens to stocks when companies merge?

What happens to stocks when companies merge?
What happens to stocks when companies merge?

M&A is a popular way for companies to increase market share, reduce competition, expand geographical influence and improve the current market price. But we’re talking about different companies becoming one. Each company has its own stock, with its own share value, volume, volatility, and so on.

So what happens to each company’s stock during the merger — and how does it impact stockholders? 

How do mergers and acquisitions affect the stock prices of two companies?

The M&A influence on the target company’s stock and acquiring company’s stock varies due to several factors. Let’s discuss what happens to a stock when another company merges or takes over and describe all the scenarios on how the stock price is handled during mergers and acquisitions.

The main questions about M&A influence on target and acquiring companies’ stocks are answered below.  

  • Is there a pre-merger volatility of stocks?
  • How does the M&A deal affect the target company’s stock?
  • How does the mergers and acquisitions deal affect the acquiring company’s stock prices?
  • What happens to the price of a stock when a publicly-traded company merges with a private company?
  • What happens to the stock price in a reverse merger?
  • How is the stock price handled among shareholders in mergers and acquisitions?

Is there a pre-merger volatility of stocks?

The target company’s stock can be affected even before the actual deal is initiated.

Mere rumors about the potential merger influence the target company’s stock. As a rule, the stock price of the target firm rises as a result of the acquiring company’s interest in it. It can often be profitable for investors who usually purchase selling company stocks in expectation of the upcoming merger. 

However, such an approach comes with potential risks since rumors about a prospective takeover don’t always lead to the deal’s closure. In case mergers and acquisitions never happen, the target company’s stock falls dramatically, and investors lose large sums. 

It’s worth noting that sometimes the target company’s stock can drop on the stage of discussing the potential merger. This usually happens if it is a hostile takeover or when there’s certain vagueness around the deal. 

How does the M&A deal affect the target company’s stock?

The stock price of the target company usually rises as a result of the deal. This happens because an acquiring company pays a premium on its shares as a way to win the appreciation of the target company’s shareholders. 

Thus, with the premium paid, the selling company stocks get higher and can attract more potential investors.

However, the stock prices of the target company can fall when the merger occurs. It takes place in case the firm experiences some financial issues and uncertainties and an acquiring company purchases it at a discount.

How does the mergers and acquisitions deal affect the acquiring company’s stock prices?

As a rule, the acquiring company’s stock tends to fall for a short period when the deal is announced. This is because an acquiring company pays a premium — either with its cash reserves or with a help of debt.

Another reason for the drop in the acquirer’s share price is the investor’s opposition to the expediency of such a merger or the sum an acquiring company has paid for the target company.


Although, there are certain situations when the acquiring company’s shares rise. It usually happens when investors consider the acquisition of the target company as one that can have a great impact on the market and competitors. In this case, the premium paid is worth it.

What happens to the price of a stock when a publicly-traded company merges with a private company?

When a public company is acquired by a private company, the stock of the publicly-traded target company tends to rise due to the premium paid on the acquisition. After the deal closure, shareholders receive cash for their existing shares.

When a public firm is an acquiring company, its share price may decline due to the same reasons and to reflect the cost of the deal.

What happens to the stock price in a reverse merger?

A reverse takeover takes place when a private company acquires a publicly-listed company (which operates as a shell company). Owners of the private company become controlling shareholders of the public company and run the business. 

In this case, the stock price of the public shell company rises, as investors tend to believe in the effectiveness of the new entity formation.

How is the stock price handled among shareholders in mergers and acquisitions?

When a company merges, what happens to the stock? There are three scenarios of how the share price of the companies involved is managed during mergers and acquisitions.

Stock-for-stock

A stock-for-stock exchange is also termed an all-stock deal. With this approach,  companies exchange stock for stock. 

For example, an acquiring Company A purchases the target Company B, and they agree on a certain exchange ratio, let’s say 1:5. It means that for every five shares of Company B existing shareholders will get one share of Company A upon the deal.

Cash-for-stock

This scenario is exactly what it sounds like. An acquiring Company A pays a proposed price in cash for the stock of the target Company B. This way, an acquired company’s shareholders receive a certain amount of cash for every share they own. 

Cash-and-stock

Two companies can agree on particular terms when planning a merger. Thus, they may use a hybrid approach when managing the stock.

Cash-and-stock scenario presupposes an acquiring firm giving the target company’s shareholders a choice — to get cash for their shares or stocks in a new company. Such a model also implies getting part of the shares in cash and another in stocks.

Key takeaways

So what happens to stocks when companies merge? Let’s summarize the information given in the article:

  • The stock price of the acquiring and target companies is affected even on the stage of rumors about the possible deal.
  • When two companies merge, the stock prices of the target company are likely to rise as a result of the premium paid by the acquiring company.
  • The share price of the acquiring company tends to drop slightly during a merger as it uses its cash reserves or debt money to pay the deal.
  • If investors don’t see the potential effectiveness of the upcoming deal, the stock prices of the companies involved may fall.
  • There are three approaches to managing shares among shareholders during a merger: stock-for-stock, cash-for-stock, and cash-and-stock.

Stock purchase 

Despite capital markets’ volatility, the most typical way to buy stocks continues to be via stock exchanges, which makes going public a very likely discussion amongst executives and corporate development professionals.

With this in mind, the M&A Community, in collaboration with iDeals, produced the IPO consideration stage whitepaper, supporting professionals in better understanding the key considerations to take before going public.

Download the whitepaper here

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