When two companies agree to be one, they merge.
The actual transaction usually involves company A offering the stockholders of company B shares of stock.
Stockholders of company B now own shares of company A. In many cases, the stock is exchanged at a rate other than one share of A for one share of B.
Shareholders of company B may receive a premium to encourage the transition.
In any case, if you were a shareholder of company B you now are a shareholder of company A.
Is this a good thing for shareholders of both companies?
The answer is yes if the combined companies have a strategic advantage over the two individual companies.
It is not unusual that after a merger the combined company begins eliminating duplicate functions. Sometimes plants and whole product lines are either sold or closed down.
The track record for successful mergers is spotty.
Timing and market position are everything and some times it is difficult to see the benefits.
As a shareholder, unless you sit on the board of directors you may not have a voice in whether to merge or not.
If the market believes the merger is a good idea, the company’s stock will rise. If the market sees no sense in a merger, the stock will often take a beating.
What should you do as an investor?
The most important thing is to see if the company resulting from the merger still fits your asset allocation plan – not all mergers are between two companies in exactly the same business.
Will the surviving company be stronger in core areas or will it be spread among so many industries that it will be hard to know where its strength is?
Is this a merger between two relatively strong companies or is one company weak?
Finally, do you really want to own the resulting company?
