7 Things Investors Should Know About M&A

By Markets Fool.com

This is the first in a three-part series on mergers and acquisitions.

Continue Reading Below

Last year was a banner year for mergers and acquisitions and the next few years could bring more of the same.

Global M&A volume hit a record high at more than $5 trillion for 2015, according to Dealogic, while 91% of U.S. M&A executives expect to increase their number of acquisitions this year, according to a survey by KPMG.

As M&A deals continue to make headlines, here are a few basic facts to give you some context surrounding the news.

1. The goals of M&A deals vary. Corporations pursue mergers and acquisitions for a variety of reasons. The acquiring company and the target company, for instance, may be competitors and combining their operations could offer economies of scale. Or the acquiring company may choose a target in a completely different industry for the purposes of expanding its lines of business. Or an acquiring company may choose to target a company because its resources could be used to improve the acquirer's products, and so on.

2. Shareholders' influence on a deal depends on what side of the deal they're on. Shareholders of target companies often have the opportunity to vote to accept or reject an acquiring company's offer. In contrast, shareholders of the acquiring company vote on deals only when the acquiring company issues shares to finance the acquisition and those shares are equal or exceed a certain threshold -- 20% of the company's outstanding common stock under New York Stock Exchange and Nasdaq rules. In the case of a true merger, when two companies join to become one new company, shareholders of both original firms often must vote to approve the merger.

Continue Reading Below

3. Deals affect share prices in some predictable and unpredictable ways. When an acquisition is in the works, the share prices of the companies involved will rise or fall depending on how the market views the deal. For example, if the target company's share price rises above the offer price, it could be a sign that some in the market believe that a higher offer price is in the cards -- either from that same bidder or from another company looking to jump into the mix. If it doesn't get to that price, it could be a sign that there is some doubt as to whether the deal will be approved. For more information, check out this detailed piece on M&A.

4. M&A deals are often funded by debt. While many companies in the last year could afford to buy other businesses thanks to record-high cash reserves, low interest rates on loans also encourage M&A. Acquisition-related loans around the world totaled more than $770 billion in 2015, the most since 2008, according to Dealogic.

5. The most active industry for M&A recently was the healthcare industry, with more than $700 billion worth of deals taking place in 2015, according to Dealogic. The key trend driving the healthcare M&A boom is the industry's response to the Affordable Care Act, aka Obamacare, according to the KPMG survey. The other top two industries for M&A activity in 2015 were technology and real estate. The top deal-making industries can often fluctuate based on changes in federal law and regulation.

6. While the value of M&A deals is up, the number of deals is down. A number of "megamergers" valued at $10 billion or more helped drive 2015's total deal value, but the actual number of deals was under 40,000, down 4.7% from 2014, The Wall Street Journal reported. Bankers blamed a "lackluster" number of midsize deals for the decline, according to the newspaper.

7. Historically, most M&A deals provided little value, according to research. For all the excitement and headlines surrounding M&A announcements, more often than not M&A deals don't serve acquiring companies as well as executives and shareholders would hope. A 2011 Harvard Business Review report cited studies that found M&A failure rates ranging from 70% to 90%. Those discouraging stats notwithstanding, some M&A deals have been known to provide major boosts to profit and shareholder value. The bottom line: As with any investment decision, investing based on M&A deals should be done only after careful research and consideration. Just because companies are rushing into the M&A frenzy, it doesn't mean you should, too.

An Alert Investor is a smarter investor.

This article originally appeared at The Alert Investor.

The article 7 Things Investors Should Know About M&A originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.