Wednesday, August 24, 2016

Why Acquiring Company's Stock Price Drop When Announcing an Acquisition?

Dear Friend you have asked a very deep valuable question and that is why I took some time to answer.
Companies after growing organically to a very large scale find it difficult to grow further. If the shareholders of such a company which doing very well but struggling to grow further organically are all believers in Value Investing, then they will not mount pressure on the management to produce growth. However more often, this is not the case. Members cry for perpetual growth, though it is unreasonable to expect and fulfil. Under such extreme pressure, management will embark on a journey of ‘Mergers and Acquisitions’ (M&A) path of inorganic growth, much against their wishes.
Many a times CEOs take-up M&A activity for personal aggrandizement and some times out pure selfish reasons as their own remuneration is often denominated as a percentage of turnover, even though the deal may not be in the interest of the shareholders.
When the shareholders of the acquiring company feel that the acquisition is not good and will not improve their lot, they resort to selling the shares as a show of their displeasure to the proposed transaction.
However, in a few rare instances, where the acquiring company is going to be genuinely benefitted the shares of the acquiring company will go up instead of falling.
As far as the second part of your question, whether the price will eventually recover the lost ground, there is no certain trend. Public memory is short, the economic environment is dynamic and the market mood is effervescent. The interplay between these external conditions as well as the company’s own performance will eventually decide the fate of the price recovery.

Progression to Wealth - Slide

Wealth creation is a gradual process