How do companies grow larger? Normally it is through years of patient growth, building brand consciousness, providing good products in a crowded marketplace or niche products to an interested audience. However, there is another way to grow rapidly, and that is by taking over another company. The two companies joined together might develop into a larger force in one particular market sector, or alternatively the newly-formed business might be able to expand into new markets, its ability to do so strengthened by the recent merger.

 

Mergers are a regular occurrence in business, but it’s the high-profile mergers that make the business world sit up and take notice. When companies which are household names talk about coming together, the result can lead to a large shift in share price for one or both of the two companies mentioned, as well as a possible shift in the share prices of companies within the whole sector, depending on the size and influence of the companies in question. Let’s have a look at three of the most high-profile mergers to take place in recent years.

 

  1. Exxon Mobil

    When oil prices are at their lowest ebb, is it the best time to enter into a merger? Exxon and Mobil appeared to think so in 1998. Both firms grew up from the fragments of Rockefeller’s Standard Oil Company, which had been broken up by court order in 1911. Nearly 9 decades later, they decided to join forces once more.

    Exxon bought out Mobil, with Mobil shareholders receiving 1.32 Exxon shares for every Mobil one. At the time, it was wondered whether Exxon had paid too much. However, in time Exxon was vindicated, as a subsequent decade-long run of high oil prices provided even greater impetus for the newly formed oil titan. Exxon Mobil stock went from around the $40 mark in late 1999 to the $95 mark in late 2007. Although it has seen some fluctuation since, despite the slump in oil price over the past year the stock is still holding strong at around 87.60.

     

  2. Pfizer-Warner Lambert

 Hostile takeovers are when a company launches an unexpected, uninvited attempt to take over another company’s business, often by making a tempting offer to that company’s shareholders. A prime example of this took place in the pharmaceutical industry around the time of the millennium. In late 1999, Warner-Lambert and AHP (American Home Products) announced their intention to enter into a merger. This would have created the world’s largest pharmaceutical company.

The day after that announcement, Pfizer made an announcement of its own – an $80 billion attempted takeover for Warner-Lambert. Initially vehemently opposed by Warner, with the company threatening to torpedo a drug it had previously been co-promoting with Pfizer. However, in the end the company came around agreeing to Pfizer’s takeover offer after the rival pharma firm upped their bid and Warner-Lambert shareholders put pressure on the board to accept. Pfizer came away as the clear winners from the deal – even more so when one considers that today the pharmaceutical units of BHP, Pfizer’s rival in the merger deal, are now owned by none other than... Pfizer.

 

Citicorp and Traveller’s Group

In 1998, Citicorp and Traveller’s Group announced their merger, forming a mega-corporation which would tower over all others in the financial sector. Traveller’s Group technically purchased Citicorp, with 2.5 shares of TG issued for every Citicorp share.The merger was originally regarded with some scepticism by onlookers, who pointed out that the Glass-Steagal act would mean that the newly formed Citigroup would have to get rid of either its banking or insurance-underwriting branches. However, the co-CEO’s prediction that the decades-old act would soon be changed was proved right. Sure enough, another act introduced in 1999 effectively nullified Glass-Steagal, allowing Citigroup to maintain its larger set-up intact.

 

Mergers can catapult firms into the financial stratosphere, but they can also allow large firms to maintain a level of dominance which they had previously held. And, of course, some mergers can be a disaster (such as that between Aol and Time Warner) or fall apart before completion.

If you hear of two companies who might possibly be joining forces, always make sure that you know;

  • That the news organisation transmitting this information is reliable
  • Which party is attempting to take over the other
  • Whether the markets see it as a good deal

Awareness in regard of these three points certainly doesn’t guarantee profit, but might help you avoid some potential mistakes when trading on merger rumours.