Merger Definition: Day Trading Terminology
Merger are deals that unite two separate companies into a single new company. There are a number of different types of mergers, and a number of different reasons for companies to go through one. The most common type is the uniting of two completely separate companies into a single new company with a new name.
They are most commonly performed to expand the reach of a company, increase market share or expand into new segments of the market, all of which are done to increase shareholder value and meet other executive goals.
In 2016 there were 17,369 deals with a total combined value of 3.2 trillion US dollars.
The five most common types of mergers are
• conglomerate: the companies do not need to share any common features or markets.
• horizontal: the companies are from the same industry, and the purpose of the merger is consolidation.
• market extension: the companies sell the same type of products, but in different market segments.
• product extension: the companies share complementary products.
• vertical merger: the companies make parts for the same final product.
Arbitrage involves trading the stocks of companies that are engaged in a merger. When a potential merger’s terms are released to the public, the trader will buy the shares of the company being acquired and sell the shares of the acquiring company.
The price of the acquisition target’s stock should rise to meet the agreed acquisition price while the share price for the acquiring company should drop as a reflection of what that company is paying as a premium in the deal.
The bigger the spread or gap between the current market prices of the two companies and the expected value of their stocks as a result, the greater the potential returns from the merger arbitrage trade.