Acquisitions and Stock Prices

When one company buys another, the share price of the company being bought (a.k.a. the target) usually rises – and that of the company doing the buying (a.k.a. the acquirer) usually falls. The target’s price jumps because the acquirer usually has to pay more than the current share price – a premium – in order to take over the company: placing a high value on the target sweetens the deal for its investors who’ll likely make a tidy profit and are therefore likely to accept. The premium also partly reflects the buyer’s assessment of the company’s value when combined with its own organization. The acquirer’s share price tends to fall if investors think its paid too much for the target – perhaps leaving less money for other things like investing in growth or paying a dividend – or if investors aren’t convinced it’ll be able to generate sales or cost synergies it may have promised. Acquiring companies comes with “execution risk” – the possibility things might not go according to plan. Systems, personnel, and culture can all clash when brought together, and any potential benefits from the partnership can be a long way off – or even found to be non-existent.