Buyer's Stock

• If the buyer is a publicly traded company, its stock typically goes down on a merger announcement. The buyer must raise funds to pay for the acquisition: if it sells stock, the current shareholder stakes may be diluted in the process -- i.e. may be worth less; if the buyer sells bonds, additional debt may make its finances shakier and subject shareholders to additional risk.
  
  

Seller's Stock

• The stock of the corporation that is being acquired typically goes up because the buyer must offer a premium for the shares to induce current shareholders to sell and to convince the board of directors that the transaction is in the shareholders' best interest.
  
  

The Surviving Company

• If the surviving company is private, the shareholders of the company being acquired receive cash for their shares, but more often than not the buyer is a publicly traded company because it is easier for a publicly traded company to raise funds for an acquisition. If the company being acquired is also a publicly traded company, its stock is exchanged for the stock of the buyer at an agreed rate. Alternatively, the selling company shareholders may elect to sell their shares in the open market before the exchange takes place. If the company being acquired is private, its shareholders receive stock in the acquiring publicly traded company.
  
  

Long-Term Implications

• Investors typically try to ascertain the long-term implications of a merger for the stock price but most of the time it's an exercise in futility because in a merger, things rarely go as promised or expected. The buyer may overpay for the acquisition and end up writing it off current earnings for years. It may have overlooked a crucial detail, or the driving force behind the acquisition may have been egos, not the corporate good. The merger may not go as smoothly as promised because of clashing corporate cultures, disparate IT systems or poor execution, or it may turn out to be a bad fit strategically. For all these reasons, few merger predictions ever turn out as expected, creating uncertainty around the stock price.