Mergers and acquisition deals can take over headlines, shake up stock prices, and inject a pulse of excitement into relatively quiet industries.
After months of negotiations, Germany-based Bayer reached a deal last month to acquire Monsanto after upping its offer to $66 billion. The all-cash offer of $128 per share is a substantial premium over Monsanto’s Tuesday September 13th close of $106.10.
Monsanto shares were up just under 1% following the announcement, possibly reflecting doubts the deal will be finalized. Bayer plans on financing the acquisition using its cash reserves and issuing dollar-denominated debt. The acquisition will most likely need to overcome significant regulatory hurdles prior to its expected close at the end of 2017. The deal comes in the wake of DuPont and Dow Chemical’s proposed $122 billion merger where the two companies plan to split into three separate entities.
Let’s take a closer look at what typically happens after mergers and acquisitions are announced and how it could impact your trading.
While it’s never a good idea to trade solely based on rumors and speculation, there still could be potential trading opportunities. When a deal is announced, the acquiring company’s stock price often declines, while the target company’s stock price often rises. The more confident the market is in the deal being finalized, the closer the stock price of the acquisition target will move to the proposed deal’s price. The length of time before the deal is finalized also influences how close the acquisition target trades to the deal price.
In the case of Bayer’s acquisition of Monsanto, there are concerns over the deal passing regulatory hurdles and a significant amount of time before it is expected to close, resulting in Monsanto’s shares trading at a significant discount to the $128 per share acquisition price. Also consider if another suitor appears and bids on the target company, or if the current acquiring company the only one interested. These two scenarios may help strengthen or disband uncertainty, and the higher the risk and uncertainty of the deal being finalized, the greater the potential reward for the opportunistic trader.
Mergers and acquisitions are financed through cash, stock, debt or some combination of the three. If a company doesn’t have enough cash or stock to cover the costs, it usually sells bonds or issues shares to raise the capital necessary. This can cause several things to occur. Concerns over the acquiring company’s ability to finance the deal can lead to the target company’s stock price trading at a greater discount to the deal price.
If a substantial amount of shares need to be issued by the acquiring company, concerns over potential dilution to its earnings could drive the stock lower. In all-cash deals, there is usually less concern over the acquiring company’s ability to finance the acquisition depending on the size of its cash reserves, credit rating, and current levels of debt.
Cross-border mergers and acquisitions funded with cash can have a large impact on forex (FX) markets. When a foreign company is acquiring a US company, or vice-versa, the cross-border cash flows can move the exchange rates between the acquiring company and its target. The study, FX Impact of Cross-border M&A, determined large deals can lead to an average 1% increase in the target’s currency relative to the acquirers’ currency.
With any trade, there are always inherent risks. Trading companies involved in mergers and acquisitions could result in a substantial profit, or a substantial loss, in a short timeframe. However, do not think that things are mispriced, companies and analysts spend hours upon hours analyzing every aspect of the deal. Make sure to do your research, and that you assess the risk before making a decision.
Visit Trading Tools & Platforms for more information to help fuel your trading plan.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade® commentary for educational purposes only. Past performance is no guarantee of future results or investment success. Member SIPC.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.