Table of Contents

How Company Stocks Move During an Acquisition

By

澳洲幸运5官方开奖结果体彩网:Andrew Bloomenthal

Updated April 22, 2025

Reviewed by

David Kindness

Fact checked by

Yarilet Perez

Part of the Series

Guide to Mergers and Acquisitions

Mergers and Acquisitions (M&💞;A): Types, Structures, and Valuations

Basics of Mergers & Acquisitions

Takeovers

Reverse Mergers

Effects of M&A

M&A Transactions and Processes

Types of M&A

M&A Examples

When one company acquires another, the stock prices of both entities tend to move in the opposite direction, at least over the short term. In most cases, the acquiring company's stock falls, and the target company's stock rises. This is because the acquiring company pays a premium for the 澳洲幸运5官方开奖结果体彩网:acquisition, in order to provide an incentive for the target company's shareholders to approve the takeover and to reflect the expected synergies and the strategic benefits of the acquisition.

Key Takeaways

When one company acquires another, the stock price of the acquiring company tends to dip temporarily, while the stock price of the target company tends to spike.
The acquiring company's share price drops because it often pays a premium for the target company or incurs debt to finance the acquisition.
The target company's short-term share price tends to rise because the shareholders only agree to the deal if the purchase price exceeds their company's current value.
Over the long haul, an acquisition tends to boost the acquiring company's share price.

�🗹� During an Acquisition, Which Stock Rises and Which Stock Falls?

The price of the target company rises even higher if there is speculation that another bidder may emerge. The form of payment for the acquisition can also affect the level🎉 of stock increase (cash, stock, or a combination). All-cash deals might be viewed more favorably from the target company side, while stock-for-stock deals could raise concerns about dilution.

Simply put, there's no motive for shareholders to approve such action if the takeover bid equates to a lower stock price than the 澳洲幸运5官方开奖结果体彩网:current price of the target company.

Of course, there are exceptions to the rule. Namely, if a target company's stock price recently plummeted due to negative earnings, then being acquired at a discount may be the only path for shareholders to regain a portion of their investments. This holds particularly true if the target company is saddled with large amounts of debt and cannot obtain financing from the 澳洲幸运5官方开奖结果体彩网:capital markets to 澳洲幸运5官方开奖结果体彩网:restructure that debt.

On the other side of the coin, the acquiring company's stock typically falls immediately following an acquisition event. This is because the acquiring company often pays a premium for the target company, exhausting its cash reserves and/or taking on significant debt in the process. But there are many other reasons an acquiring company's stock price may fall during an acquisition, including:

Investors believe the premium paid for the target company is too high.
There are problems integrating different workplace cultures.
Regulatory issues complicate the merger timeline.
Management power struggles hamper productivity.
Additional debt or unforeseen expenses are incurred as a result of the purchase.

Important

Although the acquiring company may experience a sho🍃rt-term drop in stock price, in the long run, its share price should flourish, as long as its management properly values the target company and efficiently i🦋ntegrates the two entities.

Pre-Acquisition Volatility

Stock prices of potential target companies tend to rise well before a merger or acquisition has officially been announced. Even a whispered rumor of a merger can trigger 澳洲幸运5官方开奖结果体彩网:volatility that can be profitable for investors, who often buy stocks based on the expectation of a♏ takeover. However, there are potential risks in doing this because if a takeover rumor fails to come true, the stock price of the target company can precipitously drop, leaving invest♉ors in the lurch.

Generally speaking, a takeover suggests that the acquiring company's executive team feels optimistic about the target company's prospects for long-term earnings growth. More broadly speaking, an influx of 澳洲幸运5官方开奖结果体彩网:mergers and acquisitions activity is often viewed by investors as a 📖posit꧒ive market indicator.

When a Company Is Bought, What Happens to the Stock?

The stock of the company that has been bought tends to rise since the acquiring company has likely paid a premium on its shares as a way to entice stockholders. However, there are some instances when the newly acquired company sees its shares fall on the merger news. That often occurs when the target company has been going through financial turmo✨il and, as a result, was bought at a discount.

When One Company Buys Another, Why Does Its Stock Fall?

The acquiring company's stock tends to slide in the short term because it has paid a premium for the target company, using up some of its cash reserves or perhaps taking on debt. Sometimes the stock slides because investors don't think the merger is a good idea, or that the acquiring company overpaid relative to the target's value.

Is a Merger the Same As an Acquisition?

In a merger, companies that are of comparable size agree to combine to form a new, unified company, whereas in an acquisition, a larger or more stable company typically purchases a smaller or less financially sound company. Mergers more often involve stock-for-stock deals versus acquisitions, which are frequently cash buyouts. A 澳洲幸运5官方开奖结果体彩网:merger tends to a🐠ffect shareholders in the same way as an acquisition. In both mergers and acquisitions, the target company's shares typically rise after the deal announcement, while the purchasing company's shares temporarily slide.

The Bottom Line

When a company makes an acquisition, its stock price typically drops, though the effect is temporary.🐼 The stock price of the company that is being acquired, on the other hand, typically rises. This effect is also temporary.