If a Company Gets Bought, What Happens to the Stock?

When one company acquires another, it creates significant changes for the shareholders of the acquired entity. This process reshapes the ownership structure and can lead to various outcomes for existing stock holdings. Understanding these scenarios helps shareholders anticipate the impact on their investments. The type of acquisition, consideration, and shareholder rights determine what happens to the stock.

Understanding Company Acquisition Types

Companies can be acquired through several structural methods. One common approach is a merger, where two companies combine to form a single legal entity. In a statutory merger, one company typically ceases to exist, with its assets and liabilities integrating into the surviving company. Variations like triangular mergers involve a subsidiary of the acquiring company facilitating the combination.

Another method is a stock acquisition. Here, the acquiring company directly offers to purchase shares from the target company’s existing shareholders. Shareholder participation is voluntary as they decide whether to sell their shares.

An asset acquisition is where the acquiring company buys specific assets of the target company rather than the entire entity. In this scenario, the target company continues to exist as a legal entity, and its stock typically remains outstanding.

Shareholder Outcomes in an Acquisition

When a company is acquired, the outcome for its shareholders depends on the consideration offered by the acquiring company. With cash consideration, shareholders receive a specific cash amount for each share they own. This cash is distributed upon the deal’s closing.

Alternatively, shareholders might receive stock consideration, exchanging their existing shares for shares of the acquiring company. In such stock-for-stock deals, the target company’s shares cease trading after the transaction. New shares of the acquiring company are issued to the former target shareholders, allowing them to become owners in the combined entity.

Many acquisitions involve mixed consideration, a combination of both cash and stock. This hybrid approach allows shareholders to receive a portion of the deal value in immediate cash and the remainder in shares of the acquiring company.

When an exchange ratio results in shareholders owning less than a whole share, these are known as fractional shares. Companies typically handle fractional shares by cashing them out. Shareholders receive a cash payment equivalent to the value of their fractional share.

Shareholder Rights and Participation

Shareholders have rights and opportunities to participate in the acquisition process. For many corporate mergers, shareholders are required to vote on the proposed deal. Companies provide a proxy statement outlining the terms and implications to help shareholders make an informed decision. Shareholder approval is typically a condition for the acquisition to proceed.

Shareholders who vote against a merger and believe the offer price is unfair may have appraisal rights, also known as dissenters’ rights. These rights allow shareholders to demand that the company buy their shares at a court-determined fair value, rather than accepting the offered acquisition price. Exercising appraisal rights is a legal process that must be followed precisely to preserve the right to a judicial valuation of shares.

Shareholders can sell their shares on the open market at any point before the acquisition officially closes. The target company’s stock price often rises to reflect the expected acquisition price as the deal progresses. Once an acquisition is complete, the target company’s stock is typically delisted from its stock exchange.

Tax Considerations for Shareholders

Shareholders receiving proceeds from an acquisition should consider the potential tax implications. When cash is received as consideration, it is generally taxable to the shareholder. This typically results in a capital gain or loss, calculated based on the difference between the cash received and the shareholder’s original cost basis in the shares.

In contrast, when shares of the acquiring company’s stock are received as consideration, the exchange can often be tax-deferred. Shareholders do not immediately pay taxes on the gain until they eventually sell the new shares. The cost basis of the original shares typically transfers to the newly received shares, preserving the investment’s tax attributes. This deferral depends on the acquisition qualifying as a tax-free reorganization under Internal Revenue Service (IRS) rules.

Acquisitions involving mixed consideration typically involve a blended tax treatment. The cash portion is generally taxable as a capital gain, while the stock portion may qualify for tax deferral. This structure allows for some immediate liquidity while potentially deferring taxes on a portion of the proceeds. Consulting with a qualified tax advisor is recommended for personalized guidance.