How Acquisitions Affect Global Stocks

By: Submissions

If you love to keep up to date with market news or you enjoy reading financial forums, you can’t have missed the fact that waves of excitement travel through the investment community every time a big acquisition is expected. Suddenly there’s lots of speculation about what will happen to stock prices and what will be the right moment to buy or sell. The international nature of today’s market means that big company purchases have repercussions around the clock, keeping investors on their toes. In this fast-paced environment, it has never been more important to understand how acquisitions affect stock prices and what this means for global market movements.

Acquisitions and pricing: the basics

What happens when one company acquires another? If you’re new to this, one useful way of looking at it is that it’s like buying a house. A house has a certain innate value based on the materials that have gone into its construction, but the bulk of its value is based on what people are willing to pay for it. The bigger the number of people interested in buying it, the more it’s likely to sell for. When a big company makes a bid for a smaller one, interest in the smaller one often increases, and any serious rival interest can cause its stock price to rise significantly. If a proposed acquisition falls through, however, the stock price of the smaller company can fall because of the assumption that it’s not really worth as much as was thought.

Increasingly, acquisitions are made with shares rather than with cash. When this happens, a direct relationship between the share value of each company is established. This applies at the point that the purchase is made, however, it doesn’t preclude changes in share value just before the exchange takes place, and this creates opportunities for traders to make a profit – though doing so entails quite a bit of risk.

Reputation

Along with the way that demand causes value to shift, the reputation of each company can impact the share price of the other. That most commonly occurs when a large company with a reputation for stability and success acquires a smaller one, causing its perceived value to rise just prior to the exchange, but it can also affect the value of the larger company in the aftermath of the exchange if the smaller company is seen as adding significant value to its reputation. This can happen, for instance, if the smaller company has good environmental credentials or is admired for its expertise in an area where the larger one is seen as lacking. The flip side of this is that customers can sometimes desert a smaller company because they don’t feel that the company acquiring it shares the values that are important to them.

Global reach

An acquisition can also add to the perceived value of the larger company – even before the exchange has taken place – if it indicates that the company is expanding into potentially lucrative new geographical areas. For instance, the recent purchase of AETOS Capital Bank Pty Ltd enhanced the MultiBank Group global presence by enabling it to expand into mainland China, making a positive impression on investors and, by increasing the opportunities available to its clients, promising to improve its long-term prospects. Investors need to be aware, however, that companies sometimes overreach themselves in making overseas acquisitions, and that there’s a higher risk of them being missold, so when the company being purchased is less well known it’s worth doing your own research.

The changing shape of the markets

Over the last few years, the UK has seen an increase in the number of companies registered here as people facing unemployment have chosen to create work for themselves. Around the world, however, the picture is different. The number of companies registered in the US, for instance, has dropped considerably over the same period. As a whole, there’s a shift towards larger companies acquiring smaller ones and incorporating them into larger structures.

In addition to the above, the ease with which investors can now access the global marketplace means that the reputation of particular regions has become a shortcut in assessing the value of companies. This means that when a company acquires another in an area associated with strong growth (such as Botswana or Chile) or with expertise in a particular field (such German engineering), it can gain value as a result. Increasingly, large companies are seeking to spread out across as many strong economies as possible in order to improve their trading options and limit their risk.

Ultimately, learning how acquisitions impact the global marketplace is best done through observation. This will help you to hone your instincts for how a particular purchase will develop, so that you know when and what shares to acquire for yourself.

By Lee Ralph

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