Recent Activity in Mergers & Acquisitions
One of the issues that drive market volatility is the constant evolution of businesses through the process of mergers, acquisitions (M&A), and divestitures. M&A activity seems to be at the forefront of enterprise growth in recent months as companies strive to improve the bottom line and ensure shareholders of their long-term viability in their business segments and the value of the company for shareholders’ investments.
M&A movement can sway prospective investors or traders toward their buy or sell strategies very quickly, which is one reason that companies tend to keep such moves under wraps until finite decisions have been made and often until such times that offers for takeover bids have actually been accepted, or at least tentative agreements have been reached by both parties.
Often shareholders of the acquired business benefit from conversions of their stock holdings into shares of the new enterprise that are typically of more value than their prior holdings. This gives them a gain in their holdings that they can continue to hold or trade on the market. Day traders that keep their ears to the ground or monitor such events in real time can take advantage of these events to realize gains quickly.
Business benefits abound when companies in like markets agree to merge to become an even more formidable force in their business. Such is the case where Honeywell is addressing United Tech for a potential merger of the companies stating that the combination of their resources generates an undeniable benefit. There is much to be worked out in this approach however as United Tech stated Honeywell’s offer grossly undervalues their business while at the same time overstates the synergies between the two companies.
Mergers & Acquisitions – the Down Side
There is a down side to M&A-generated volatility of course. Once a bid is offered to acquire a competitor or a business in a total different market segment, the market for the targeted company can drop drastically as other businesses jockey for position in pursuit of a counter offer. In those instances an investor may respond quickly to dump shares in the target company to cut their potential losses, rather than anticipating profits from the venture.
A recent example highlights this scenario where BASF share values dropped considerably as the result of news that a counter bid was being proposed for DuPont which agreed to merge with giant Dow Chemical last year.
Reacting to Merger & Acquisition Activity
M&A activities often hit the news wires quickly without much advance notice, leeway for reaction time, or evaluation of how such activity fits into your strategy. Tracking hints of activity through reliable sources can give traders a distinct advantage through advance knowledge of mergers, acquisitions, and selloffs that be leveraged for financial gains or at least to limit losses. Volatility generated by M&A can be a trader’s chance to cash in on the direction they believe the values will go for both the acquiring company and the target of the acquisition.
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Disclaimer: SureTrader Blog is not intended for U.S. persons. Stock information is not to be viewed as buy or sell recommendations.