What happened

Shares of Philip Morris International  (NYSE:PM) dropped last month after investors balked at the potential merger between the international tobacco giant and Altria (NYSE:MO), the company from which it split in 2008. According to data from S&P Global Market Intelligence, Philip Morris shares fell 13% over the course of the month. As the chart below shows, the vast majority of those losses came toward the end of the month after news broke that the two companies were holding merger talks.

PM Chart

PM data by YCharts

As you can see, Altria shares also fell on the news, a sign that investors don't seem to think a combination is in the interest of either company.

A man lighting up a cigarette

Image source: Getty Images.

So what 

Philip Morris stock first began to slide on Aug. 26 when rumors spread that the two companies were discussing a merger. The stock fell 4.3% that day and tumbled another 7.8% the following day on high-volume trading after Philip Morris confirmed the talks. 

In a brief statement, the company said that it is in discussions with Altria for a "potential all-stock, merger of equals." Philip Morris is worth about $113 billion, compared to an $81 billion market cap for Altria 

Philip Morris also reminded investors that any transaction would be subject to approval from the board of directors and shareholders, and said it would not make any further comment on the matter in the meantime.

Now what 

It's easy to see why the companies would consider a merger. When they separated, Philip Morris took control of international markets and Altria retained command of the U.S, meaning the combined company would be a global powerhouse. They are also partners in IQOS, Philip Morris's heat-not-burn product, which Altria plans to start selling in the U.S. soon. Finally, both tobacco stocks are also threatened by the global decline of smoking due to health concerns, a mortal threat to the industry.

Though some analysts seemed to like the idea of a deal, others were skeptical that it would work out in Philip Morris' favor due to the strict regulatory environment in the U.S. Recently, several state and federal agencies have been cracking down on JUUL and other vape companies for selling to minors and offering flavors.

No one knows if the merger will come to pass, but investors in both companies should keep their eye on this developing story, as it's likely to move both stocks one way or another in the coming months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.