What Happens If a Stock You Own Gets Bought Out?

When a company you own shares in is acquired by another entity, it can significantly impact your investment. This event, known as a corporate buyout, changes the landscape for shareholders of the acquired company. Understanding the mechanics of these transactions is important for investors to navigate the process effectively. The specific terms of the deal will dictate what happens to your stock holdings and what actions you may need to take.

Types of Acquisition Deals

Corporate acquisitions can take several forms, each determining the consideration shareholders receive for their stock. The structure of the deal fundamentally influences the outcome for investors.

In a cash deal, the acquiring company pays a fixed cash amount for each share of the target company. For example, if Company A buys Company B for $100 per share in cash, shareholders of Company B receive $100 for each share they own when the deal closes. This type of transaction provides immediate liquidity to the selling shareholders.

Alternatively, a stock deal involves the acquiring company offering its own shares in exchange for the target company’s shares. Shareholders of the target company have their shares converted into shares of the acquiring company based on a specified conversion ratio. For instance, a 1-for-2 stock merger agreement means target shareholders receive one share of the acquiring company for every two shares they currently hold.

Some acquisitions are structured as mixed deals, where a combination of cash and stock is offered to the target company’s shareholders. This hybrid approach allows for both immediate cash realization and continued equity participation in the combined entity. The agreed-upon valuation usually sets how much cash and stock shareholders receive.

Tender offers represent a mechanism for acquisition where the acquiring company directly offers to buy shares from shareholders, often at a premium to the current market price. These offers can be structured as cash, stock, or mixed deals, providing a direct route for the acquiring company to accumulate a controlling interest. A tender offer is a public bid for stockholders to sell their stock.

Impact on Your Stock Holdings

The type of acquisition deal directly impacts your stock holdings when a company you own is bought out. Your shares are treated differently depending on the deal’s structure.

In an all-cash acquisition, your shares are converted into a predetermined amount of money. This cash is then deposited into your brokerage account.

For all-stock deals, your existing shares are exchanged for shares of the acquiring company. This exchange occurs based on the agreed-upon conversion ratio. If the conversion results in fractional shares, these are not issued as new shares but are instead cashed out and the funds deposited into your brokerage account.

In mixed deals, you receive a combination of cash and new shares from the acquiring company. This process integrates the mechanics of both cash and stock deals, with any resulting fractional shares of the stock component usually being paid out in cash.

Following the completion of an acquisition, the acquired company’s stock is usually delisted from public stock exchanges. This means the shares can no longer be traded independently on those exchanges.

Tax Implications of a Buyout

A company buyout triggers a taxable event for shareholders, and understanding these implications is important for financial planning. The tax consequences vary depending on the type of consideration received.

When cash is received in a buyout, it is treated as proceeds from a sale, resulting in a capital gain or loss. This gain or loss is calculated as the difference between the cash received and your original cost basis in the shares. Short-term capital gains, from shares held one year or less, are taxed at ordinary income rates, while long-term capital gains, from shares held over one year, qualify for preferential tax rates.

In stock-for-stock mergers, the exchange of shares can be tax-deferred, meaning no immediate tax is due until the new shares are sold. The original cost basis of your old shares transfers to the new shares received. However, if any cash is received, such as for fractional shares, that cash portion is taxable.

Mixed deals involve both cash and stock components, leading to a combination of tax treatments. The cash portion is taxable as a capital gain, while the stock portion may qualify for tax deferral.

Maintaining accurate records of your original cost basis is important for correctly calculating any capital gains or losses. Brokerage firms report these transactions on Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” which you will use to report the transaction on your tax return. This form provides details such as the date of sale, gross proceeds, and your cost basis.

Shareholder Actions During a Buyout

Shareholders have specific actions and considerations during a company buyout to ensure they are informed and can participate in the process. Being informed helps navigate the complexities of an acquisition.

Review all official communications from the company, including proxy statements and tender offer documents. These documents provide detailed information about the terms of the deal and the valuation of the companies involved. Proxy statements are filed with the Securities and Exchange Commission (SEC) and are publicly available.

In merger scenarios, a shareholder vote is required to approve the deal. Shareholders receive proxy materials that outline the proposal and allow them to cast their vote either in person, by mail, or electronically. The outcome of this vote is binding, and a majority or supermajority approval is needed for the merger to proceed.

If a tender offer is made, shareholders must decide whether to tender their shares to the acquiring company. Brokerage firms provide instructions on how to participate in a tender offer, including deadlines for submitting shares. A tender offer gives shareholders the opportunity to sell their stock at a specific price within a predetermined timeframe.

Staying informed about the acquisition process is important, including monitoring news regarding regulatory approvals and the anticipated closing date. Seeking advice from a qualified financial advisor or tax professional is advisable for personalized guidance.