The often bandied terms of mergers and acquisitions are familiar to the business world and the stock market experts, but some Canadian investors are sadly unfamiliar with the terms’ definitions and what affect this may have on their investments. This introduction to these business actions and their stock market results may help. In the case of a merger, two or more companies combine their resource entities to make a new corporate entity different from the entities that originally entered into the merger.
This can affect the investor in a few ways. For instance, if there are two companies intending to merge and one of the company’s stock values is higher than the other, the resulting stock price of the newly formed corporation will find a middle ground between the two. This can affect the investor negatively by decreasing their investment value and percentage of company ownership. It is at this time that the newly formed corporation can implement a buy back program or some other value adding operation. However, a merger can increase stock value if both companies are strong performers and their financial outlook is positive.
The Canadian Competition Bureau oversees merger requests to ensure that these mergers do not damage the interests of the general public, small businesses and investors. If it is deemed that a monopoly won’t be created and the merger will benefit the companies’ shareholders, the Bureau agrees to the merger. The law firms specializing in this procedure and working with these companies set out to draw up the paperwork and carry out the Bureau’s recommendations.
For example, TD Bank and Canada Trust merged in 2000. The Competition Bureau examined their proposal and weighed it against the possibility of monopoly and performance levels. When they returned with their decision, they had stipulated that if the merger were to happen than Canada Trust would have to divest their MasterCard operations. Capital One stepped in and took over. With this particular business facet let go, the Bureau felt that any monopoly dangers had been averted and thus allowed the two financial giants to combine their corporate power to create TD Canada Trust.
In the case of an acquisition, one company absorbs one or more other companies without changing its entity. The company intending to acquire another will back that company’s shares from its shareholders at an established rate. The preferred shareholders vote on the prospect and the takeover bid is either accepted or rejected. This affects share price in two ways. If the acquisition is successful, by creating an entity that can better serve its consumer base and gives better future prospects for profit, the share price will increase. If the acquisition is ill fated it can lead to an overabundance of outstanding common shares, loss of consumer service decreased or scattered market share. This can cause share prices to plummet. This is a nightmare that no Canadian investor wants to live through.
An example of acquisition is the 2004 acquisition of Prime Restaurants of Canada Incorporated, operating out of Toronto, by American conglomerate J.H. Chapman Group, L.L.C. The Competition Bureau watches this proposal, and other proposals like it, closely as they can lead to a majority of foreign control of Canadian interests. This acquisition was examined closely and found to be beneficial; therefore the acquisition was given approval. Through income trusts and stock buyout, the Canadian investor felt the positive effects.
Understanding mergers and acquisitions can give the Canadian investor the ability to take precautions or realize profit or share power. Therefore it is necessary to for the investor to fully inform himself or herself before taking any action in these situations.