Merger and acquisition activity is becoming more common as companies try to expand their business more quickly than is possible through ‘organic’ growth, or see better perspectives as part of a larger organisation. Companies may merge with each other, take over other companies, or be taken over by other companies.
When a deal takes place, investors in the company being acquired will be asked to decide whether they want to sell their shares to the bidder at the stipulated price.
In many cases, mergers and acquisitions bring significant changes to the management team or to the way companies are run, which may affect whether investors want to continue holding the shares.
Often, as part of the merger deal, existing shareholders will be offered shares in the new entity, or a mix of shares and cash. When Vodafone sold its stake in US telecoms group Verizon, for example, shareholders were offered cash and/or shares in Verizon as part of the deal. The choice largely depended on shareholders’ opinion of Verizon and its future prospects.
Sometimes shareholders will not have the option of continuing to hold shares in the resulting company if the bidder plans to delist it from the stock market, as is usually the case with M&A backed by private equity firms.
Corporate actions can have a significant impact on the value of investments. It’s important that shareholders, and sometimes bondholders, understand their options and rights in order to be able to take decisions in their own best interests.