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How Mergers and Acquisitions Will Affect the Stock Market

When the tempest lashes, one closes down the windows and doors of the house and waits for it to blow over. Similar is the implication of Merger and Acquisition activity in stock markets. A scene was witnessed in American markets with Lehman Brothers’ bankruptcy and the sale of Merrill Lynch to Bank of America, to tackle the financial crisis. Uncertainty at the nation’s biggest securities firms made some companies think twice, postpone or give up altogether the M & A deals and technical investing suffered. It continues to suffer till this day.

Each pillar of the financial market has begun to doubt the capacity of the other pillar to take on the load of problems. 2008 has been a thoroughly uncomfortable year for the stock market. Mortgage credit crisis created a series of problems. The buyout deals in the tech industry are in doldrums. Big companies are adopting a more cautious approach to M & A, resulting in the fall of valuations. It is becoming hard to ink a merger deal, with few healthy investment banks, showing enthusiasm. This will result in fewer quality acquisitions. In an unsettled market it is harder to go public, than it has been prior to 2008.

An acquisition is also known as takeover or buyout. One company buys the other. It can be friendly or hostile. Its effect on the stock market will depend upon the process through which the acquisition takes place. Generally, a larger firm takes over a smaller firm. Even in the normal circumstances success of acquisitions is difficult and 50% of the cases are generally unsuccessful. In the prevailing depression, volatility and uncertainties of the market, acquisitions have become more complicated.

To estimate the share value of the company after the process of merger is perhaps, beyond the reach of an ordinary investor. While thinking to include such shares in the portfolio, one must take the advice of a financial consultant, because the issues involved are many and complicated. Such transactions carry with it the entire liabilities accrued by that business, over its past and the risk that the company is likely to face in the uncertain commercial environment.

The share prices react depending upon the type of merger. Whether it is horizontal, vertical, market-extension, product-extension merger or conglomeration!

Accurate business valuation is the important aspect of M & A process as these impact the share prices. Motive behind the mergers like Synergy, increased revenue or market share, cross-selling, economy of scale, taxation, geographical or other diversification, resource transfer, vertical integration, empire-building, diversification-all these factors have direct bearing on the level of share prices.

Thomas Straub shows how M & A performance depends upon many variables. He lists 12 of them that will have the bearing on the shares positively or negatively. They are Strategic logic determinants like, “market similarities, market complementarities, operational similarities, operational complementarities, market power, and purchasing power. Organizational integration which is reflected by three determinants: acquisition experience, relative size, cultural compatibility. Financial / price perspective, which is reflected by three determinants: acquisition premium, bidding process, and due diligence.”

So, the share market reacts in a bizarre way to M & A deals. Sizes of the transaction, the market mood, shareholder value, the type of regulations to control haphazard movements in the market, are some of the factors. Stringent market regulations or liberal rules both have the capacity to destabilize the market. Biddings generally throw the market into turmoil, and the chances of investors taking wrong decision are very high. The important aspect is what shareholder value that the transaction will lead to. If a high defensible shareholder value is created, the market will boom and in the reverse scenario, the market will tend to fall heavily.

Stock Market Sectors and Industries

Are they important?

Yes. You want to have a way of looking at all the stocks within the markets divided into categories by industries and then further into sectors. This allows you to see where the action is. If there is an outstanding stock within an industry it can help you in a number of ways. You may find a second leading stock in the same industry if the reason for the move is industry relevant.

For example, when the first steel company made a deal to supply China some time back you may have missed the first but it could have given you a heads up on spotting the second.

Another benefit to looking at industries is finding supporting companies. So when the steel company was roaring, who was shipping it to China? You could look into the shipping sector and target who was going to lead that group to new heights.

How do I judge the health of an industry? It should be evident from what’s going on within it. Looking at the top 5 stocks in any industry or sector is going to show you if that industry is profitable, making good sales and growing it’s market.

Should I buy a great stock in a poor industry? Often a stock cannot move in isolation from it’s industry no matter how good it is. Again think of human involvement here. You may think of a bank that’s doing great guns at the moment but the weight upon that industry is just too much. No matter how good the individual bank may be it’s not going to soar into being a lone leader whilst the industry is suffering. There are safer places to put your money.

If there are several great looking stocks in an industry, should I buy them all? No. Don’t just piggy back onto similar stocks. In any sector there are not likely to be more than 1 or 2 truly great leaders. Best to focus on finding those leaders rather than just picking up the left overs. They may get taken along for a short ride but you’ll be missing the great gains a leader will give you.

Hope you found it informative reading about stock market sectors and industries.