What You Need to Know About Mergers and Acquisitions and How They Affect Your Investments

What You Need to Know About Mergers and Acquisitions and How They Affect Your Investments

Mergers and acquisitions (M&A) are transactions in which the ownership of companies, business units, or assets are transferred or consolidated with other entities. M&A can have significant impacts on the financial performance, market position, and competitive advantage of the involved companies, as well as on the value and returns of their shareholders and investors.

In this article, we will explain the basics of M&A, the different types and motives of M&A, and how they affect your investments. We will also provide some examples of recent M&A deals in various industries and sectors.

What are the types and motives of M&A?

M&A can be classified into different types based on the relationship between the acquirer and the target, the purpose of the transaction, and the mode of payment. Some of the common types of M&A are:

• Horizontal merger: A merger between two companies that operate in the same industry and offer similar products or services. The motive of a horizontal merger is to achieve economies of scale, increase market share, reduce competition, or diversify product offerings.

• Vertical merger: A merger between two companies that operate at different stages of the production or distribution chain of a product or service. The motive of a vertical merger is to secure supply or distribution channels, reduce costs, improve efficiency, or enhance quality control.

• Conglomerate merger: A merger between two companies that operate in unrelated industries or markets. The motive of a conglomerate merger is to diversify risk, expand into new markets, leverage synergies, or cross-sell products or services.

• Market extension merger: A merger between two companies that offer similar products or services but operate in different geographic markets. The motive of a market extension merger is to increase market coverage, access new customers, or exploit growth opportunities.

• Product extension merger: A merger between two companies that offer different but complementary products or services in the same market. The motive of a product extension merger is to broaden product portfolio, cross-sell products or services, or create value-added offerings.

• Acquisition of assets: An acquisition in which the acquirer purchases only some or all of the assets of the target company, rather than its entire equity. The motive of an acquisition of assets is to acquire specific resources, capabilities, or technologies that are valuable for the acquirer’s business.

• Acquisition of stock: An acquisition in which the acquirer purchases some or all of the equity shares of the target company, either through a tender offer or a stock swap. The motive of an acquisition of stock is to gain control over the target company’s management, strategy, or operations.

• Cash deal: An M&A deal in which the acquirer pays cash to the target company’s shareholders in exchange for their shares. The advantage of a cash deal is that it provides immediate liquidity and certainty for the target’s shareholders.

• Stock deal: An M&A deal in which the acquirer pays stock to the target company’s shareholders in exchange for their shares. The advantage of a stock deal is that it allows the target’s shareholders to participate in the future performance and growth of the combined entity.

How do M&A affect your investments?

M&A can have various effects on your investments, depending on whether you are an investor in the acquirer, the target, or both. Some of the possible effects are:

• Change in share price: The announcement of an M&A deal can cause a change in the share price of both the acquirer and the target, depending on how the market perceives the deal’s value creation potential, synergies, risks, and costs. Typically, the target’s share price rises to reflect the premium offered by the acquirer, while the acquirer’s share price may rise or fall depending on whether it pays a fair or excessive price for the target.

• Change in earnings per share (EPS): The EPS of both the acquirer and the target can change as a result of an M&A deal, depending on how it affects their revenues, costs, profits, and number of shares outstanding. Generally, an M&A deal is considered accretive if it increases the EPS of both parties or dilutive if it decreases them.

• Change in dividends per share (DPS): The DPS of both the acquirer and the target can change as a result of an M&A deal, depending on how it affects their cash flows, payout ratios, and dividend policies. Generally, an M&A deal is considered dividend-enhancing if it increases the DPS of both parties or dividend-reducing if it decreases them.

• Change in ownership structure: The ownership structure of both the acquirer and the target can change as a result of an M&A deal, depending on how it affects their shareholding patterns, voting rights, board composition, and corporate governance. Generally, an M&A deal is considered ownership-strengthening if it increases the alignment of interests between the management and the shareholders or ownership-weakening if it decreases them.

What are some examples of recent M&A deals?

M&A activity has been robust in recent years, as companies seek to capitalize on opportunities, overcome challenges, and create value in a dynamic and competitive environment. Here are some examples of recent M&A deals in various industries and sectors:

• Energy: In 2020, the energy sector witnessed several M&A deals, driven by low oil prices, weak demand, and the need for consolidation and diversification. Some of the notable mergers and acquisitions include Chevron Corporation (CVX) buying Noble Energy for $5 billion,1 Pioneer Natural Resources Company (PXD) announcing a $4.5 billion purchase of Parsley Energy, Inc. (PE),2 Cenovus Energy Inc. (CVE) and Husky Energy Inc. (HSE) announcing a $2.89 billion merger,3 Devon Energy Corporation (DVN) and WPX Energy, Inc. (WPX) conducting a $6 billion merger,4 and ConocoPhillips (COP) announcing a $9.7 billion purchase of Concho Resources Inc. (CXO).

• Technology: In 2021, the technology sector saw several M&A deals, fueled by innovation, disruption, and digital transformation. Some of the notable mergers and acquisitions include Microsoft Corporation (MSFT) acquiring Nuance Communications, Inc. (NUAN) for $19.7 billion, Amazon.com, Inc. (AMZN) buying MGM Studios for $8.45 billion, NVIDIA Corporation (NVDA) agreeing to acquire Arm Limited for $40 billion, Salesforce.com, Inc. (CRM) completing its $27.7 billion acquisition of Slack Technologies, Inc. (WORK), and Intuit Inc. (INTU) acquiring Credit Karma, Inc. for $8.1 billion.

• Healthcare: In 2022, the healthcare sector experienced several M&A deals, motivated by innovation, regulation, and consolidation. Some of the notable mergers and acquisitions include AbbVie Inc. (ABBV) acquiring Allergan plc for $63 billion, Bristol-Myers Squibb Company (BMY) completing its $74 billion acquisition of Celgene Corporation, Thermo Fisher Scientific Inc. (TMO) announcing a $17.4 billion purchase of PPD, Inc. (PPD), AstraZeneca plc (AZN) buying Alexion Pharmaceuticals, Inc. for $39 billion, and Pfizer Inc. (PFE) agreeing to acquire Trillium Therapeutics Inc. for $2.26 billion.

• Automotive: In 2023, the automotive sector witnessed several M&A deals, driven by electrification, automation, and globalization. Some of the notable mergers and acquisitions include Stellantis N.V., the result of a $52 billion merger between Fiat Chrysler Automobiles N.V. (FCAU) and Peugeot S.A., Volkswagen AG (VWAGY) acquiring a majority stake in Navistar International Corporation for $3.7 billion, Hyundai Motor Company (HYMTF) buying Boston Dynamics for $1.1 billion, Vietnamese EV maker VinFast debuting on the Nasdaq via SPAC merger with Black Spade Acquisition, and Tesla, Inc. (TSLA) acquiring Maxwell Technologies, Inc. for $218 million.

Conclusion

M&A are important transactions that can have significant impacts on the involved companies and their investors. As an investor, you should be aware of the types, motives, and effects of M&A on your investments, as well as the examples of recent M&A deals in various industries and sectors.

M&A can create value by generating synergies, increasing market power, enhancing efficiency, or diversifying risk. However, they can also destroy value by overpaying, underestimating risks or costs, or failing to integrate effectively.

Therefore, you should evaluate each M&A deal carefully and critically before making any investment decisions.