One question we get from students in our free 6-week investing course is, what do I need to know when it comes to how mergers and acquisitions affect my stocks?
Great question. Every situation is different, but we do have some tips to share on what to do if your stock holdings are being rocked by merger and acquisition activity – which seems to be very common in today’s market.
Priority #1: Think Long Term
There are mergers that are great opportunities, and there are mergers that are perhaps not the best outcome for you as a company shareholder. One thing is almost always true: stock prices tend to be quite volatile when a merger/acquisition is announced. This volatility can even happen to other stocks in the industry or sector, as the market might perceive these deals as a signal of strength or weakness in the marketplace.
You, the empowered investor, don’t need to worry about any of this if you are thinking about the long term. It’s very complicated to know what will happen with price during a transition period like this, so don’t worry about it – let the markets do their thing and you just focus on the long term.
Priority #2: Get Informed
As a shareholder, you may get some standard information about the merger activity. (If you invest in a bond or mutual fund, you may not get much notice at all.) While I’ve just said that if you’re thinking long term, you don’t need to take any action, it’s a good practice to be informed so you know what is going on in the market.
While we’ve previously mentioned our favorite personal finance blogs, most blogs don’t cover specific industry transactions. Our sister website has a great list of the best websites for breaking news which is where you’ll find this information – what you’ll want to do is try to read at least a couple of analyst’s opinions, so you can get a few views and decide for yourself what this situation means for you.
Priority #3: Think Big
Last but not least, I want to remind you that a merger and acquisition is not just about the stock price – there are other impacts that you may want to consider before buy/selling a position in a stock. Here are some big picture thoughts:
- Staff: Will a large population of employees be displaced with the merger? Does the company have a plan to handle this?
- Future Vision: Does the future of the combined companies seem clear and sensible? Or was this simply taking a competitor our of the marketplace with no major strategic change?
- Ethics: Were you an investor in a company because of their ethics, or maybe locally based? If so, does the acquiring company share those characteristics that you admire?
To summarize, you do not need to make rash decisions when it comes to merger and acquisition activity in your stock portfolio. Review the situation and get multiple perspectives, ride out the market volatility, and make all decisions with a long term investing view.