When Mergers Disappoint

Why would a company be downgraded and see its stock price fall after it announces that it's purchasing another company? Well, it all depends on the particulars. Let's say you own shares in Office Automation Services Co. (ticker: ZIPZIP), which is growing quickly and doing very well. Both you and Wall Street expect continued rapid increases in sales and earnings.

Then one day ZIPZIP announces that it's buying a typewriter retailer called Typewriter Land Inc. (ticker: QWERTY). Clearly, Typewriter Land is a less-dynamic business. It's likely to slow down Office Automation's progress. This is why some analysts will downgrade Office Automation -- because it's now a less-attractive company. You might not be as eager to hang on to your shares, as well.

If, however, Office Automation announced that it was buying a company that could help it grow even faster, the news would likely draw investor interest, and might send shares up. It all depends on how effectively investors expect the merging parties to work together. Some mergers make great sense, while others are less promising. Some otherwise promising mergers are bad deals mainly because one company significantly overpays for the other, making it hard for the deal to be profitable in the near future. Other mergers have little rationale behind them other than the fact that the executives involved wanted the prestige, excitement, and/or money they could get from a merger.

You can learn more about how the financial world works in our Investing Basics area and in our Fool's School.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 500803, ~/Articles/ArticleHandler.aspx, 10/24/2016 3:05:12 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,227.45 81.74 0.45%
S&P 500 2,150.69 9.53 0.45%
NASD 5,303.55 46.15 0.88%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes