Investments 101 When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. In general, the acquiring company's stock will fall while the target company's stock will rise.
The reason the target company's stock usually goes up is, of course, the premium that the acquiring company typically has to pay for the target.
The acquiring company's stock usually goes down for a number of reasons. First, as we mentioned above, the acquiring company must pay more than the target company currently is worth to make the deal go through. Beyond that, there are often a number of uncertainties involved with acquisitions. Here are some of the problems the takeover company could face during an acquisition:
- A turbulent integration process: problems associated with integrating different workplace cultures
- Lost productivity because of management power struggles
- Additional debt or expenses that must be incurred to make the purchase
- Accounting issues that weaken the takeover company's financial position, including restructuring charges and goodwill
Read more: Acquisition https://www.investopedia.com/terms/a/acquisition.asp#ixzz52hF5Rm00
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