Strategies for Investors Owning Stock in a Company with a Looming M&A Deal

Mergers and Acquisitions (M&A) is an umbrella term that implies to the combination of two businesses. M&A provides buyers trying to achieve strategic goals an alternative to organic growth, while offering sellers a chance to cash out or to share in the risk and reward of a newly formed business. Earlier, Anand Jayapalan had spoken about how a merger and acquisition deal may set a stock price soaring if things go right. For investors in a business that is negotiating a potential acquisition, it is prudent to be watchful. An M&A deal may lead to either a loss or windfall, and it is up to investors to figure out what their next move is.

Here are a few important strategies and tips that can help investors who own stock in a company with a looming M&A deal:

  • Think if investments can fit the interests: An investor must think if their interests in the company are still aligned or not. They must determine whether the company will expand to an area outside of their interests, losing the focus that initially attracted them. It is not smart to blindly accept a huge change in a company one has invested in. One must evaluate the situation they are in properly, as they do not need to focus on things outside their interest.
  • Do some research before reacting: People should do their research properly, and not jump the gun on making any decision. Certain acquisitions can be quite lucrative, while some may end up being complete flops. It is prudent to orderly understand the reasons why a business is making a potential acquisition. One should try to take a look at similar previous deals in the space to determine how they have turned out.
  • Focus on the long-term goals: No single deal can make or break a portfolio. Having a healthy asset-allocation strategy is focused on anticipating a certain degree of turbulence. All investors desire to enjoy a steady long-term growth. Having a well-rounded, effective diversification strategy in place makes sure that no single event or company has too much power over the long-term financial health of the business.
  • Look for alignment of business vision: Many investors tend to be skeptical of acquisitions as they can be more about “empire-building” instead of improving the core competencies of the acquirer. It is vital to make sure that the acquired company gels well with the vision of the business and make sense as per the current business acumen
  • Focus on the fundamentals: If one is interested in investing for the long term, they need to focus on certain fundamentals like price-earnings ratio, revenue, cash flow, earnings per share, and so on. As long as these are still in place, one can effectively stick to their long-term strategy. On the other hand, if one is trading the stock with a short-term strategy, it is better to focus on technical analysis like price action and relative strength index.

Earlier, Anand Jayapalan had pointed out that an M&A deal can have a material impact on the valuation of a company. Investors need to consider the impact on dividends and share prices. After all, a large deal can erode the cash reserves of a company and affect its dividend-paying ability in the short term. But if viewed favorably, a deal can cause an upswing in the stock price as well. Investors need to keep themselves updated on the deal synergies and stay prepared for volatility.

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