How do Mergers and Acquisitions affect stock prices?
On Sep 15, $Adobe(ADBE.US$ announced it has entered into a definitive merger agreement to acquire Figma, a web-first collaborative design platform, for approximately $20 billion in cash and stock. The combination of Adobe and Figma will usher in a new era of collaborative creativity.
However, the stock market interpreted the merger in the opposite way, by driving the stock price down 16.79%.
Why did Adobe drop like a stone? Is merger & acquisition (M&A) a boon or a bane?
Before the deal: Cash vs. Stock
The company has to decide whether to use cash or stock to pay for the deal.
According to the PBC School of Finance, in studies covering more than 1,200 major deals, researchers have found that, at the time of the announcement, shareholders of acquiring companies fare worse in stock transactions than they do in cash transactions.
On the one hand, when paying with cash, the acquirer sends a signal that its stock may be undervalued so that the acquirer has little interest to publish new stocks at a low price.
On the other hand, when paying with acquirer stock, the buyer is sending a signal that its stock may be overvalued. In that case, the acquirer has stronger motivation to publish new stocks to pay for the deal.
Besides, a stock deal makes it possible for the two companies to share a common interest and enables the seller to potentially defer the payment of tax, but that's another story.
Without further ado, let's dive into some cases.
Bull case: Cash acquisition
Announced June 16, 2017, $Amazon(AMZN.US$ entered grocery business by conducting its $13.7 billion purchase of Whole Foods Market in cash, the biggest acquisition ever for the e-commerce and cloud computing giant. AMZN stock opened 3.3% higher amid the good news.
Bear case: Stock merger
The telemedicine companies $Teladoc Health(TDOC.US$ and $Livongo Health(LVGO.US$ announced an $18 billion merger on August 5, 2020. Livongo shareholders will receive 0.5920 times shares of Teladoc Health plus cash of $11.33 for each Livongo share, but the percentage of stock in this payment weighs more than 90%. As a result, the stock of Teladoc plunged 19.01% on the announcement day.
After the deal: Synergistic effect vs. Goodwill impairment
According to Harvard Business Review, The expected net gain to the acquirer from an acquisition, also called shareholder value added (SVA), is the difference between the estimated value of the synergies obtained through the acquisition and the acquisition premium.
The synergistic effect can act by combining mutual advantages, making up the product line, or monopolizing the market.
However, the buyer usually pays a premium (i.e. 30% above the current price) that may already be priced in the potential benefit from the synergistic effect.
Unfortunately, money doesn't grow on trees, if the buyer pays too much premium and the synergistic effect does not hold the water as expected, a goodwill impairment occurs and the buyer suffers a loss as the value of that asset declines.
Bull case: Synergistic effect
In Nov 2019, $Charles Schwab(SCHW.US$ announced to acquire TD Ameritrade, and the share price rocketed 7.33%, as investors believe the combination will create a strong synergistic effect.
Bear case: Goodwill impairment
Take $Alibaba(BABA.US$ as an example. In the quarter ended Dec 31, 2021, the company made a US$3,945 million impairment of goodwill in relation to the Digital media and entertainment segment, and its income from operations decreased 86% yoy in this case.
What's your takeaway?
Is Merge & Acquisition a boon or a bane? Which stocks have potential opportunities?
Rewards:
Leave your comment / investment ideas below before Sept. 22, and 6 mooers with the best ideas will win 600 points based on quality and originality!
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Johnnie Worker : I mean buying Figma is not a bad idea, since you dont need to play around with a strong competitor and can monopolize the market.
But seriously, the premium $Adobe (ADBE.US)$paid is way too much!
1) Paying 50x PS is insane, the PS ratio of Adobe itself is only 8.4
2) Figma's valuation was just $10 Billion back in June 2021, when the market was literally crazy, and it's supposed to drop further to like $5 bcz of the current bear market. So Adobe paid 4 times! The reason is probably due to Microsoft's potential offer, and Adobe is afraid.
3)The cash and stock of the deal is 1:1, but $10 B in cash is not a penny, enough to give so much pressure on Adobe's operation, especially during its downtrend period giving that the earnings miss the estimates
Shahram Sarooj2 : Yes
sgmic66 : k
lightfoot : 20 billion is much capital outflow. Will the benefits of this merger be recognized quickly as an assets or more costs to implement. it could drag down the stock price. investors look for positive signs but later could prove very equitable for all.
PaAg1378 : M&A is a business decision akin to investors deciding which equities to acquire. Boon or bane really hinges on the accuracy of the calculated risks and profitabilities which in turn are always dependent on macro and micro determinants in the economy, market, industry, stakeholders and organization.
I will like to see Mastercard and Paypal together
Milk The Cow : I'm not really sure if the merging company is a trash or what
+
(Yet to DYODD 
).
.
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on a new project. Depending on whether their acquisition is a great demand by the economy, their performance will improve greatly after years if they did a good acquisition 
. I'd personally experienced the good side on this one 
.
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Usually when a company merge, it means reduced in competition
However, shareholders of the company who benefit more from the merger, their share price will increase & the company that benefit less, the share price will drop
But, if the good company absorbed a trash company, it will only just drag them down if they does not has any good restructuring plans...
As for acquisition, the company that is offering, the share price will most likely drop in the short-term as they are investing big sum of
So, it just depending on the situation. It can be a boon or a bane. But, generally, it should be a good thing
Godaddycool : originality and quality it comes for the person who built an idea that provide the quality of product with hard work and not copying to anyone.originally made by his own idea and working hard just to built a strong and powerful product for long time positive incomes.
決然的凱特 : This is not a good thing, the market has already reflected it.
charles87win : frightful and the persistent interest us scary
101628973 charles87win: UNH bought $5.4B but stock didn’t plunged.
If $20B what would be the growth of the co yearly?
If the returns are negligible why invest ?
Unless someone is in the take ??
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