If a Company Is Bought Out, What Happens to My Stock?

When one company purchases another, a buyout or acquisition means the target company’s stock will typically cease to trade publicly as it becomes part of a larger organization. Shareholders generally receive compensation for their shares, which can significantly impact their investments. Understanding the specific terms of such a transaction is important for shareholders.

Understanding Acquisition Deal Structures

Acquisition deals can be structured in several ways, each directly influencing what shareholders receive for their stock. One common structure is an all-cash deal, where shareholders get a fixed amount of cash for each share they own. This provides immediate liquidity and a clear, known value for their investment. The shares are removed from the exchange after the acquisition.

Alternatively, an acquisition can be structured as an all-stock deal. In this scenario, shareholders receive shares of the acquiring company’s stock in exchange for their existing shares in the target company. The exchange is based on a predetermined ratio. This type of deal means the value received can fluctuate with the acquiring company’s stock price after the transaction closes.

Many acquisitions use a mixed consideration deal, which combines both cash and stock. Shareholders in these transactions receive a portion of their compensation in cash and a portion in shares of the acquiring company. This structure offers a balance, providing some immediate liquidity while also allowing shareholders to participate in the future performance of the combined entity through the acquiring company’s stock. The specific proportions of cash and stock vary depending on the terms negotiated in the acquisition agreement.

The Acquisition Timeline and Shareholder Role

The acquisition process begins with an announcement, which leads to immediate changes in the stock price of the companies involved. The target company’s stock sees a rise due to the premium the acquiring firm offers to secure shareholder approval. Conversely, the acquiring company’s stock may dip due to the costs and potential risks associated with the deal.

Following the announcement, the proposed acquisition undergoes a period of regulatory review and approval. This period ensures compliance with antitrust laws and regulations. Shareholders will then be asked to vote on the merger. A proxy statement, which outlines the terms of the merger and the board’s recommendation, is distributed to shareholders.

In some situations, a tender offer might be initiated. A tender offer is a direct proposal from the acquiring company to buy shares from the target company’s shareholders at a specified price. Shareholders decide individually whether to “tender” their shares. Once approvals are secured and conditions met, the transaction reaches its closing or effective date. At this point, the shares of the acquired company are formally exchanged for the agreed-upon consideration, whether it’s cash, stock, or a combination. Shareholders are notified by their brokerage firm, and the exchange occurs automatically within their brokerage account.

Tax Considerations for Shareholders

Receiving consideration from an acquisition can trigger tax implications for shareholders, often resulting in capital gains or losses. A capital gain occurs when the proceeds from the sale or exchange of shares exceed their original cost basis. The tax rate applied depends on the holding period: short-term capital gains, held for one year or less, are taxed at ordinary income rates, while long-term capital gains, held for over a year, receive preferential tax rates.

Understanding the cost basis of the original shares is important for accurately calculating any gain or loss. This basis includes the original purchase price plus any commissions or fees paid. When cash is received as consideration, it is fully taxable in the year the acquisition closes. This means that the entire cash amount received above the cost basis is subject to capital gains tax.

In contrast, stock-for-stock exchanges may qualify as tax-deferred reorganizations under IRS rules. If the transaction meets these criteria, shareholders may not owe immediate taxes on the stock portion of the consideration until they sell the new shares received. However, if any cash is included in an otherwise tax-deferred stock-for-stock exchange, that cash portion is taxable.

For mixed consideration deals, the cash component is taxable, while the stock portion might be eligible for tax deferral if the transaction qualifies as a reorganization. Shareholders receive Form 1099-B from their brokerage firm, which reports the proceeds from the acquisition for tax purposes. Consulting a qualified tax professional is advisable for personalized guidance.

Treatment of Employee Stock and Other Equity Types

Beyond common stock, other forms of equity held by employees or investors are handled specifically during an acquisition. Restricted Stock Units (RSUs) are a common form of employee compensation that can be impacted. In an acquisition, RSUs might undergo accelerated vesting, and then either cashed out or converted into RSUs of the acquiring company. The specific terms are detailed in the acquisition agreement.

Employee Stock Options (ESOs) also have particular treatments. If the options are “in-the-money,” they may be cashed out. Alternatively, ESOs might be converted into options to purchase shares of the acquiring company, or their vesting schedule could be accelerated to allow employees to exercise them before the deal closes.

Preferred stock, a less common type of equity, often has specific provisions in the event of an acquisition. These provisions might include a predetermined liquidation preference. Preferred stock may also have conversion rights, allowing it to be converted into common stock of the acquiring company at a specified ratio. These rights are outlined in the preferred stock’s original terms.