How mergers and acquisitions impact your investment
Stephen Grootes learns more about the effects of mergers on an investment portfolio in this episode of Investment School, brought to you by CFI, a licensed and authorized FSP.
One of the ways a company can diversify its revenue, increase share prices, and potentially tap into new markets is by merging with or acquiring another company. However, this method often seems positive in theory but proves to be a lot more challenging in practice and could cause an unexpected decrease in profitability.
To discuss how investors should approach mergers and acquisitions, The Money Show’s Stephen Grootes is joined by Viv Govender, Portfolio Manager at Rand Swiss, and Patrick Mathidi, Head of Equities at Aluwani Capital Partners.
Listen to this edition of Investment School below. Brought to you by CFI, a licensed and authorized FSP.
Govender mentions a few good acquisitions in recent history, particularly Meta’s purchase of Instagram & WhatsApp, adding to the Metaverse. He explains that when a significantly larger company acquires a smaller company that fits within its ecosystem, the success rate is higher compared to companies of similar stature deciding to merge.
This seems to be a risk that equally sized companies are still willing to take, says Grootes, and poses the question as to why this happens and what determines a successful merger. Mathidi explains that companies may feel that a merger is financially sound on paper and appeals greatly to management, but what is often miscalculated is the blending of company cultures.
“Trying to put two different cultures together - irrespective of what gets said beforehand – when it comes down to it, personal interest and self-preservation trumps.” – Patrick Mathidi, Aluwani Capital Partners
Mathidi continues by saying the combination of cultures between two merging companies should be determined as early as possible to ensure success and lessen the chance of clashing.
Shareholders can face various situations when a company they’re investing in decides to merge or is acquired. Investors could be paid out, which is often a big win according to Govender, or they could keep their stocks if they feel the merged company is an improvement.
“Generally, if you have a share that is about to be acquired, you’ve won a prize, effectively. Because there will be a premium for control, there’ll be an increase in the share price.” - Viv Govender, Rand Swiss
In essence, investors need to evaluate whether the merger or acquisition gives them more trust in their shares. If not, it might be better to cash out when the share price increases.
For more insight and updates on the everchanging world of investing, make sure you tune in to Investment School, brought to you by CFI, every Thursday on The Money Show with Stephen Grootes (6pm-8pm).
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