When a company is acquired, the general public view is positive. And why not? The acquired company now has a far-greater pool of resources such as funding, expertise, etc. If the company was not doing so well, the acquisition will most likely mean a complete reorganization of management and other company processes (think of it as a makeover). All of this points to greener grass and a better bottom line in the future.

On the other hand, the acquiring company just spent a large sum of its cash on the purchase. In many cases, companies will borrow and use other means of generating the funds needed to make the purchase. This would have made significant changes to many key ratios. Furthermore, the company now has a major task ahead of it. In many cases there are significant overlaps in personnel and layoffs must be made, which are magnets for lawsuits. Further integration of systems and personnel must be made. All of these are expensive steps to take. Also, do not forget the acquiring company inherits any liabilities the purchased company may have.

The last thing to note is that there is method to what may seem as madness behind all acquisitions. The acquiring company has done its analysis of the purchase and may believe that the benefits outweigh (or will eventually outweigh) any negatives. While its stock price may take an immediate hit, it will climb back up and beyond in the long run if all works out as planned. Whether that happens or not is always debatable.

If you own shares of MSFT then the original acquisition is bad news for you because the price per share will go down. In most cases the acquirers shares go down in value unless the market thinks it’s a good investment. There are a lot of negatives to acquisitions especially of big firms….. in this case time will tell.