Impact of Merger & Acquisition Announcements on Stocks Market Behavior In the UK

Introduction

The United Kingdom, United Kingdom Overseas Territories, and the British Crown Dependencies have several attractive and advanced stock markets, including the Eastern Caribbean Securities Exchange (ECSE), Cayman Islands Stock Exchange, Bermuda Stock Exchange, and London Stock Exchange. These stock markets use electronic resources and telecommunication to accept and perform trades. Traders also use these systems to track stock market reforms such as the formation, location, and market capitalization net worth of the London Stock Exchange. Mergers and acquisitions are common in stock markets because they increase income for organizations, boost cash flow within the economy, and significantly contribute to the growth of a region's economy. These mergers and acquisitions alter the behavior of stock markets, which can lead to a positive or negative impact on any region's economy. The paper seeks to identify the effects of mergers and acquisitions strategies on Stock Markets in the UK.

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Literature Review

Several scholars have researched the nature of the United Kingdom's stock markets and the impacts of merger and acquisition strategy on these stock markets. The studies show that stock markets of countries in the UK flourish even when their economies are below average. A study investigated the UK's stock markets and trends that show fluctuations in the United Kingdom's stock markets and indicated that mergers and acquisition strategies have a significant impact on the UK's economy (Nasimi and Nasimi 2020, p. 50). The researcher also found out that mergers and acquisitions may display positive results provided that all the other economic factors are favorable.

A team of researchers investigated the process of adopting a merger and acquisition in various economic conditions (Hecková et al. 2017). These researchers identified different strengths and shortcomings of adopting a merger and acquisition and explained the impacts of mergers and acquisitions on stock markets and the economy. The study confirmed that mergers and acquisitions have both positive and negative effects on stock markets.

Impact of Merger &Acquisition Announcements on Stocks Market Behavior In the UK

A fall of stock value for the buying

In a merger and acquisition, the acquiring firm's stock price falls while the purchased company's stock value rises. These stock market changes are temporary because the acquiring corporation incurs a temporal debt or spends its income on financing the target company (Kang et al. 2020, p. 45). The business can also incur unforeseen expenses during the merger and acquisition process, which lowers its vales on the stock market. Other factors that drop the acquiring firm's stock value during the merger and acquisition include the judgment of investors. The purchasing firm's investors perceive that their company will pay the target firm premiums high premiums; therefore, the managers alter their firm's financial statements to lower its financial position to pay less to acquire the target company. The regulatory and management power issues bring in complications that extend the merger timeline and reduce the acquiring company's productivity; therefore, its stock value falls. Research notes that market shares of the buying company deteriorate whether it is a non-horizontal and horizontal merger (Hecková et al. 2017). Still, the company will be affected more if it engages in a non-horizontal merging agreement.

The stock value of the target company shoots

The target company's stock price rises because its shareholders increase its market value to make a profit from the merger or acquisition deal. The cost of stock shares of developed firms drops. In contrast, the stock shares of companies that are struggling financially rise because the developed company loses money to empower the target company financially. Research reveals that the absence of a flawless capital asset valuing model leads to an unsatisfactory level of revenues for the buying company's shareholders if the merger is undesirable (Nasimi and Nasimi 2020, p. 15). The developed company should prepare to endure the merger's negative impact as much as it will enjoy the benefits of expansion. In a research, experts found out that companies that engage in non-horizontal mergers experience insignificant changes (Hecková et al. 2017). The falling in stock value of the acquiring company and the rise in the target company's market value is temporary because the expansion the acquiring company experiences will grow its value on the stock market with time. The merger and acquisition empower both companies in the end because it will provide them with enough money in their cash reserves to run their operations.

Hostile bids in the UK public M&A market

Companies that seek to take over other firms employ an aggressive bidding strategy in the stock market so that the Board of the target companies accepts the bid and rejects the competitors' offers. Hostile bidding requires the buying company to directly present its bid and proposal to the target company's shareholders through the Board of directors if its managers reject the deal. The UK stock market has a City Code on Takeovers and Mergers (Code) that governs the hostile bidding process (Levy et al. 2020). The bidder must disclose to the Take Over Panel its intentions in the merger and acquisition process, the inducement fees it is willing to pay the target company, the number of finances it is offering the target company in the takeover agreement, the target pension scheme trustees, the impact of the takeover agreement on the employees of the target company and the bidder's intentions of those employees. The Takeover Panel gives the bidding company 28 days to fulfill these requirements, and it also extends the duration whenever the Board of the target company requests a time extension.

The bidding process in the stock market limits private companies

The Code grants the target company authority to request or access the information it needs from any bona fide bidder who shows interest in the merger and acquisition agreement. The bidding process limits a private company more than a public company because it may not disclose some vital information that the target company demands (Levy et al. 2020). The Code also insists on a secretive and confidential bidding process while the Takeover Panel Executive consults six parties regarding the offer. The bidding and target companies are excluded from the consultations, including their employee representatives and the companies' advisers.

Conclusion

In conclusion, stock market investors should be careful with accounting tricks that managers use to inflate their company's share prices to attract potential mergers. They should pay more attention to the next quarter's earnings besides long term benefits. Investors should not worry about disappointing EPS and declining operating margins because some dubious managers increase operational spending to grow investments. These managers offer acquisitions at a fair price, increase the current quarter's EPS, and record attractive cash balances on the balance sheet, but they will increase the EPS for the next quarter. Nevertheless, a company that seeks to expand should not fear implementing he merger and acquisition strategies if it will grant it to better opportunities. The impacts of merger and acquisitions on the UK stock market is a mode to show how the strategy affects other stock markets worldwide regardless of the country and the trye of economy the country is experiencing.

References

Hecková, J., Frankovský, M., Birknerová, Z., Chapcáková, A., and Zbihlejová, L., 2017. Analysis of the Post Merger and Acquisition Process of Implementation of the Cross-border Mergers and Acquisitions through the pDM&A Methodology. Journal of Management and Business: Research and Practice, 9(2), pp.26-34.

Kang, E., Nantharath, P., and Hwang, H.J., 2020. The Strategic Process of Merger and Acquisition (M&A) Market Using Integrating Change Management. The Journal of Distribution Science, 18(6), pp.57-62.

Levy, L., Withers, N., Scargill P., M. and Burrows, S., 2020. https://content.next.westlaw.com/8-502-2187?__lrTS=20201013072840873&transitionType=Default&contextData=(sc.Default)&firstPage=true. Thompson Reuters Practical Law.

Nasimi, R.N., and Nasimi, A.N., 2020. Forecasting Stock Market Returns An Empirical Investigation for the United Kingdom.