HOW DOES A MERGER AFFECT SHAREHOLDERS? (2024)

Mergers are common in the business world. Companies often seek to combine their resources, strengths, and market position to achieve growth and profitability.

However, mergers can have a significant impact on shareholders. This process can make it difficult for shareholders in each company involved to know what to expect and how their respective share values will be affected.

In this article, we'll delve into the impact of mergers on shareholders and uncover essential steps to prepare for a merger's whirlwind.

HOW ARE SHAREHOLDERS AFFECTED?

The impact of a merger on shareholders can be positive or negative. Suppose the merger is successful and the new entity performs well. In that case, shareholders may see an increase in the value of their investment. However, if the merger goes differently than planned and the new entity underperforms, shareholders may experience a decrease in the value of their investment.

The stock performance is just one way a merger affects shareholders. Shareholders can be affected in various ways depending on the specific circ*mstances and events that occur within a company.

Let's take a look at some of them.

1| IMPACT ON STOCK PRICES.

Every merger has a different effect on stock prices. The impact of a merger on shareholders depends on the precise details of the transaction and the market's perception of the transaction's value.

Suppose a share exchange completes the merger. In that case, the exchange ratio determines whether the firm would get a premium above its share price before the announcement of the agreement. The company's share price rises typically, although this may be limited if the share price of the merging partner falls, eroding the initial premium.

However, inserting acollar agreementcan reduce the risk of erosion that raises the exchange ratio if a stock to be swapped falls below a specific level. Collar agreements minimize the downside for a company's shareholders at the expense of its merger partner and the merging company's owners.

2| IMPACT ON A DIVIDEND.

Mergers can also affect dividends, which are the payments made by the firm to its shareholders as a reward for their investment.

If a company's financial position improves after a merger, shareholders may see an increase in dividend payments. However, if the merger results in lower profits, the company may reduce or eliminate dividend payments, negatively impacting shareholder income.

3| CHANGES IN VOTING RIGHTS.

Shareholders also have voting rights, which allow them to participate in important decisions affecting the company. Mergers can lead to changes in voting rights, with shareholders often required to vote on the merger proposal.

Sometimes, the resultant company's stockholders have less voting power after the merger than the parent firms. It frequently leads to disagreements, and actual shareholders may see changes in their voting power or dilute their ownership stake.

To avoid this risk, stakeholders must communicate the benefits of mergers and acquisitions and ensure that each stakeholder understands how their power will be affected.

HOW CAN SHAREHOLDERS PREPARE FOR A MERGER?

The conditions surrounding a merger can be critical. Hence, it would be best to learn about the nature of the union, meaningful information about the other firm involved, the types of benefits that shareholders will receive, which company will control the deal, and any other relevant financial and non-financial aspects.

Remember that a company's decision to merge with another is not always final. If you are a stakeholder in the company, you have a say in whether it merges with another.

If your analysis and evaluation tell you that a merger is not a good deal or could be a fantastic financial opportunity, voting with your shares is the best method to control decision-making.

Here are things to consider when preparing for a merger:

1. CONSIDER THE TERMS OF THE MERGER.

Evaluating the merger terms can give you an idea of how it may impact your investment and whether the terms are favorable.

For example, consider the exchange ratio and the potential impact on the acquiring company's stock price if it is astock merger. If it is acash merger, look at the premium offered and the tax implications of the cash payment.

2. EXAMINE FINANCIAL STATEMENTS.

Examining essential facts for each company engaged in the merger is a good idea. If you are in the process of acquainting yourself with the company, thoroughly examine and analyze the union to determine if it's a worthwhile opportunity.

If you discover it isn't, the odds are that the newly established corporation won't be either.

Additionally, when reviewing financial statements, review both companies' most recent financial statements and annual reports.

3. MONITOR YOUR INVESTMENT.

Keep a close eye on your investment before, during, and after the merger. Check stock prices, financial reports, and news releases regularly to assess the impact of the merger on your investment.

Reviewing the merger agreement can help you understand how the merger will impact your investment. Staying informed about the merger's progress and any updates from the company can help you make informed decisions about your investment.