debora-sumopayrollBusinesses merge because decision makers and board members from both companies decide that the combination of firms will result in a stronger, more profitable company. Though the merger may benefit the new firm, and even customers, in the long run, stockholders from the companies feel the advantages and disadvantages of a merger immediately.
Stockholders on both sides of the business merger experience changes in the value of their stock during the period directly before the official merger announcement if stocks of the target company are bought with cash from the acquiring company. Stockholders of the target company (the company being bought) typically see the value of their shares rise, while the stockholders of the acquiring company see the value of their shares lower.
The stockholders of the target company in the acquisition can keep their shares after a business merger if the acquiring company made a stock-for-stock purchase of the target company. Stock-for-stock purchases essentially replace the stock of the target company with the stock of the acquisition company. Though the stockholders of the target company have the same amount of shares after a stock-for-stock purchase, their voting power is diminished because of the larger number of stocks available after the merger.
Stockholders are presented with an opportunity to purchase stocks at discounted prices, and make large returns later, during merger talks. When merger talks occur, the stock price of the target company rises. However, the price of the stock does not raise to its acquisition price -- the price the acquiring company will pay per share to buy the company. This presents stockholders with an opportunity to buy the target company's stock while it is low and then sell it after the merger is complete.
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