An acquisition occurs when one company purchases 50% or more of another company’s shares, thereby making it the dominant shareholder and giving it a controlling stake in the acquired company.
Purpose of Acquisitions
Acquisitions can be undertaken for a number of different reasons, the main ones being to expand market share, reduce costs, create synergies, acquire niche assets or expertise and achieve economies of scale.
The basic principle underlying any acquisition is that it would be cheaper to acquire some capacity that another company already has than to develop that capacity internally.
The efficiency of acquisitions, however, are often called into question, both informally and through a number of influential studies by prominent business academics.
Acquisitions can be a simple way for a company’s management to expand their powers and justify their compensation, even though the process adds little or no value for the shareholders of the acquiring company.
Furthermore, acquisitions can often fall afoul of regulators when they threaten the competitiveness of one or more markets that the acquiring company will operate in. This can lead to costly and lengthy legal battles, and produce negative press for the acquiring company.
Hostile Vs Friendly Acquisitions
Acquisitions are often discussed in terms of being ‘friendly’ or ‘hostile’ depending on whether the acquisition attempt is looked on favorably or not by the shareholders or management of the company being acquired.
Friendly acquisitions often involve the participation of the company being acquired to facilitate the accumulation of the majority stake in the company’s ownership.
Hostile acquisitions need to file their intent with the SEC, and generally involve the acquiring company going directly to the market with an above-market offer for the shares.
The company being acquired in a hostile acquisition may attempt various legal or other means of impeding the process.
Acquisitions and Trading
Acquisitions can offer a number of excellent opportunities for day traders throughout the process. In fact, there are day traders and trading companies whose entire trading strategies are based on trading the opportunities that are created during acquisitions.
Trading around acquisitions involves deep analysis of the acquiring company and the company being acquired, as well as a dedication to tracking any relevant information that is produced regularly during the acquisition process.
That said, day trading around acquisitions is not something to be taken lightly, and day traders should commit themselves to developing the knowledge and skills for trading acquisitions with a long term perspective in mind.
The share price of the acquiring and acquired companies will move on very specific pieces of information, and day traders need to understand in advance what these key pieces of information are and when they are likely to be revealed.
While it is the big name acquisitions that make the headlines, most acquisitions usually occur with small and medium sized businesses, and are abundant in this part of the market.
Day traders who dedicate themselves to understanding the nuances of trading acquisitions have an excellent potential to achieve a successful trading career.