Stocks Market Behavior in the UK - Report Example

Introduction

The stock market is an open marketplace that facilitates buying and selling second-hand securities. In other words, it is a section of a capital market where the selling and purchase of industrial, government, and other securities happen. In other words, a merger is an agreement between two or more entities that consolidates them into one entity. At the same time, an acquisition is an agreement that allows one company to take over the other. The paper seeks to investigate the impact of Merger and Acquisition announcements on Stocks Market behavior in the UK. The study's context revolves around the behavior of the stock market participants; the government, companies, and individuals in UK.

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The Importance

The critical thing to realize is that the UK stock market's Take Over Panel uses the Takeover Code to regulate mergers and acquisitions and control their operations (Zerdin 2019). The UK had around 4000 mergers between 1973 to 1998, and the numbers increased to 21,730 by the end of 2010 (Sherif 2012, 2-11). A study conducted between 1975 to 1984 shows that 63% of merger and acquisition transactions were mixed payments, including 24% cash transactions and 18% equity transactions (Sherif 2020, 12). The UK recorded 1,560 mergers and acquisitions in 2018, and the most expensive deal was Comcast Corporation taking over Sky plc for 42 million Euros (Zerdin 2019).

Furthermore, the UK stock market earned 2.1 billion Euros in the 2nd Quarter of 2020 from foreign companies abroad buying UK companies, which is the lowest value recorded since the 1.9 billion Euros were recorded in the 2nd Quarter of 2014 (Mallet 2020). The value of UK companies acquiring foreign companies abroad was 4.4 billion Euros in the 2nd Quarter of 2020, which is a slight increase of 0.3 billion Euros than the 4.1 billion Euros recorded in the 1st Quarter of 2020 (Mallet 2020). The research topic is beneficial to business students from finance, insurance, procurement, accounting, marketing, and more. It is important to note that the knowledge about the impact of Merger and Acquisition announcements on Stocks Market behavior in the UK will help them in career development since all types of companies and business professionals engage in stock market business transactions one way or the other.

The importance of the paper is to investigate the impact of Merger &Acquisition announcements on Stocks Market behavior in the UK and to determine how organizations and business experts can take advantage of the positive effects to grow their business and careers and mitigate the negative impacts of mergers and acquisitions. Remarkably, the primary impact of mergers and acquisitions in the UK stock market companies can expand their market share and increase their financial position through this strategy (Mateeva and Andonovb 2020). The target company's stock value rises while the price of the buying company's shares fall because of mergers and acquisitions (Zerdin 2019). Additionally, organizations face other challenges when mergers and acquisitions are announced on the stock market because some lose or gain valuable shareholders (Levy et al. 2020). Some target companies overstate their values while buying companies understate their values (Zerdin 2019). The companies extort one another in the merger and acquisition agreement. Moreover, the business strategy also promotes unethical business activities in companies that decide to use aggressive bidding techniques (Levy et al. 2020). A study shows that 70% of businesses in the UK are affected by mergers and acquisitions in the UK stock market (Levy et al. 2020).

Aim of the Project

Companies adopt mergers and acquisitions for expansion and growth because it is a beneficial and trending strategy in the corporate world. The project investigates the impact of Merger and Acquisition announcements on Stocks Market behavior in the UK. The study will examine how mergers and acquisitions influence the UK stock market participants' decisions from businesses, people, and the government (Hecková et al. 2017). The study will cover the reforms that the UK stock market has undergone because of mergers and acquisitions and the benefits and challenges the stock market participants face because of these reforms (Mateev 2017).

Objectives

The research's objective is to investigate the impact of Merger &Acquisition announcements on Stocks Market behavior in the UK. The researchers seek to explore the five purposes of this research. 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. Why do companies adopt the merger and acquisition strategy in the United Kingdom's stock market? What the process of merging or acquisition in the UK? What is the current level of performance of mergers and acquisitions in the United Kingdom's stock market compared to their performance in the past five years? What are the negative and positive effects of the mergers and acquisitions on the UK stock market participants? How do businesses, people, and the government in the UK stock market deal with the negative impacts of mergers and acquisitions?

Literature Review

Several scholars have researched the nature of the United Kingdom's stock markets and the impacts of mergers and acquisition strategies on these stock markets (Mateev 2017). 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 significantly impact the UK's economy (Nasimi and Nasimi 2020). The researcher also found out that mergers and acquisitions may display positive results provided that all the other economic factors are favorable.

In a merger and acquisition, the acquiring firm's stock price falls while the purchased firm's stock value rises (Mateev 2017). 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 first thing to remember is that the UK is still the top investment destination in Europe even though Foreign Direct Investment (FDI) in the region dropped by 19% when left in the EU (Zerdin 2019). It would help if you also realized that the value of UK companies' foreign acquisitions was estimated to be £71.1 billion in 2018, compared with £35.2 billion in 2017 (Zerdin 2019). Unpredicted expenses during the merger and acquisition process, the investors' judgment, and the regulatory and management power issues might extend the merger timeline and reduce the acquiring company's productivity, drop the acquiring firm's stock value (Kang et al. 2020).

Studies argue that although mergers and acquisitions positively impact the shareholder's wealth in the target firms, they have adverse effects on the buying firm's returns (Mateev 2017). On the other hand, mergers and acquisitions impact the shareholder's wealth on bidder/acquirer company negatively even though it brings positive abnormal returns for the same firm (Tetia 2020). It would be best to understand that the buying company's market shares deteriorate whether it engaged in a non-horizontal and horizontal merger (Hecková et al. 2017).

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). In research, experts found out that companies that engage in non-horizontal mergers experience insignificant changes (Hecková et al. 2017). However, 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. The critical point is that the strategy may decrease expenses of the new ventures, survival in the dynamic business environment and structure, maximize shareholder wealth, achieve economies of scale and scope, reduce costs and increase returns on equity for the entity the is created after the merger or acquisition (Rahman et al. 2018).

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 (Mateeva and Andonovb 2020). In other words, 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). In this case, 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, how much money it will pay for the merger or acquisition, 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 (Levy et al. 2020). 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 (Levy et al. 2020).

Companies use an aggressive bidding strategy in the stock market so that the Board of the target companies accepts the bid and rejects the competitors' offers (Shams 2020). 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). Companies should understand that there is an undesirable part of the merger as much development is realized (Mateeva and Andonovb 2020). The impacts of mergers and acquisitions on the UK stock market is a model to show how the strategy affects other stock markets worldwide regardless of the country and the type of economy the country is experiencing (Shams 2020).

Conclusion

In conclusion, mergers and acquisitions in the UK affect all stock market participants from shareholders, companies, stock market experts, and the government. The investors continue to invest in mergers and acquisitions despite experiencing the negative impacts of this strategy in the stock market because its benefits outweigh its adverse effects. In this case, more investigation about the impact of Merger and Acquisition announcements on Stocks Market behavior in the UK should be done to caution the participants about the negative impacts and how to mitigate them and enlighten the participants about the positive effects.

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 DM&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'.