The world of mergers and acquisitions is an exciting and unpredictable one, with numerous, high value deals completed on an annual basis.

In 2016 alone, technology companies announced more than $500 billion worth of transactions, which represents the second-highest annual total since the e-commerce boom of 2000.

But what happens to the share prices of companies ahead of large-scale takeovers, mergers and acquisitions? In this post we will explore this in closer detail.

How Do Takeovers Impact on Individual Share Prices?

In simple terms, the acquisition or merger between two firms has a predictable short-term impact on all affiliated share prices. There is even a generic rule for this, which states that the company acquiring stock will see its value fall while the target business rises on the back of speculation and a significant increase in assets.

This rule is underpinned by a simple financial law, as the buying company are usually required to pay a premium to complete the acquisition and this has a direct impact on their fiscal resources. This firm will also see its share value decline marginally due to the uncertainties that are often associated with acquisitions, including a tumultuous integration process, the accrual of debt and any subsequent accounting issues surrounding restructuring and fiscal management. In some instances, auditors are used to uncover potentially impactful financial data, and this can also reveal findings that influence share prices.

The Last Word: Why These Events do Not Reflect Long-term Trends

In contrast, the target of the acquisition benefits from a huge influx of capital, boosting share prices in the short-term as the deal is completed. Such a trend cannot be sustained, of course, particularly in the case of a straightforward acquisition where target companies will ultimately see their shares taken over by the purchaser. Over time, you would expect to see this trend reverse, as the buying firm comes to benefit financially from its purchasing decision and continues to grow its assets incrementally.

This is a principle that can be applied to the whole of the acquisitions and mergers process, where short-term trends and stock prices are usually reversed over a sustained period of time. The procurement of Nokia (first by Microsoft and then Foxconn Technology) serves as a relevant case in point, as the mobile brand saw its share price rise significantly during both purchases only to devalue considerably once the process was completed and the subsequent integration of technologies was completed.