Equity Market Reactions to the announcement of an M&A Deal
Of principal concern to a dealmaker — whether the board of the acquiring company or the CEO recommending the deal — is whether the share price of the company will rise on the announcement of the acquisition of a target company … and by how much. Of course the target company’s share price will rise; I’m not talking about them, but rather the bidder’s share price.
In QFinance, a very extensive on-line financial markets resource, I’ve written an article entitled ‘Coping with Equity Market Reactions to M&A Transactions‘. In it, I make the following arguments:
- Overall, stock returns to acquirers tend to be negative or insignificant—in contrast to target companies, where stockholders can benefit greatly.
- Companies that believe they may be targets can influence the value of an ultimate acquisition through the design of defensive techniques and by how they react to bids when they occur. Similarly, acquirers can influence the target share prices through their actions prior to the bid.
- Most acquirers are overconfident in their ability to conduct acquisitions successfully.
- Careful planning, including a robust internal and external communications plan, is required to mitigate the impact on equity markets of acquirers.
- Many factors influence equity market reactions to an M&A bid, including how friendly or hostile the bid is, the financing structure of the bid, the relative size of the two companies, and whether the transaction is a merger or an acquisition.
- Deals conducted in the most recent merger wave appear to have taken some of these issues into account and show better relative performance (relative to the market) than deals conducted in the 1980s and 1990s.
Read in light of the downturn in activity that has taken place since that article was written, this is another reason for caution in executing deals at this particular time. Where there are markets with great uncertainty, as we certainly have now here in Europe if not globally, boards are cautious anyway about announcing large M&A transactions. When the share price is volatile, further negative pressure is the last thing that shareholders need.