Lately I have been digging further into corporate finance. It is interesting to see how mergers & Acquisitions ( M&A ) work and the impact that has on the company. In 2017, One of the biggest deal was Amazon bought the Whole Foods for $13.7 billion in cash. The deal values Whole Foods at $42/share. Shareholders of Whole Foods enjoyed a $9 jump after the deal. How would this deal help Amazon? Retailing industry has been struggling in recent years due to online competitions and some companies are lacking the awareness of technology advancement, ultimately these companies disappeared. Back in 2015, Mr.Ma, CEO of Alibaba Group. mentioned that the combo of online retailing and physical stores are going to be the mainstream of retail world in the future because of the use of big data. You would not survive with only online platforms or physical locations. As I mentioned in the other post, big data is going to be the most valuable resource of the business world. Amazon’s deal fit perfectly with this formula. It has the largest data resource in the world. This would provide the exact information needed for its physical stores; in this case, the Whole Foods chain would be able to know what kind of inventory they should carry in the right location; what type of groceries that they should be invest in due to customers’ purchase patterns. As a result, company would minimize opportunity cost by analyzing big data.
What happen to the stock prices of companies that are involved in the M&A? Usually, there’s a short term effect on both companies. Generally speaking, the acquiring company’s stock price would fall due to uncertainties of the purchase. It creates concerns about that if it is a good buy among its shareholders. On the other hand, the targeted company’s stock price would rise because the acquiring company usually pays a premium for the acquisition.
There are a lot of cross boarder M&A so far in 2017 as well. I would love to dig further into them in the future posts.
It may have a high entry point now but Amazon is still a buy for me:) Could also wait and see potential dip later on.
P.S. I have a position in Amazon.