What Happens to Shares When a Company Is Acquired?
Navigate the complexities of company acquisitions and their direct impact on your equity. Gain clarity on how your investment evolves.
When a company is acquired, shareholders holding stock in the acquired entity often experience significant changes to their investments. An acquisition is when one company purchases another, gaining control of its operations, assets, and liabilities. These events generate interest among investors, as deal terms directly influence the value and form of their holdings. Understanding how these transactions affect shares is important for investors.
Understanding Acquisition Deal Structures
Company acquisitions can be structured in several ways, primarily differing in the type of consideration offered to the acquired company’s shareholders. The most straightforward approach is a cash acquisition, where the acquiring company pays a predetermined amount of money for each share of the target company. Shareholders receive cash in exchange for their stock, providing a clear and immediate financial outcome.
Another common structure is a stock acquisition, where the acquiring company offers its own shares in exchange for the target company’s shares. Acquired company shareholders become shareholders in the acquiring company. The value of their new holdings then depends on the future performance of the acquiring company’s stock.
A mixed acquisition combines both cash and stock as consideration. This structure provides flexibility, allowing shareholders to receive a portion of the deal value in cash and another portion in shares of the acquiring company. The specific blend of cash and stock is negotiated as part of the acquisition agreement.
Outcomes for Acquired Company Shares
The specific outcome for shares of an acquired company directly depends on the deal structure. In a cash acquisition, the shares of the acquired company are exchanged for cash at a specified price per share. For example, if a company offers $100 per share in cash, shareholders will receive $100 for each share they own upon closing.
In a stock acquisition, the acquired company’s shares are converted into shares of the acquiring company based on a predefined exchange ratio. This ratio determines how many shares of the acquiring company target shareholders will receive for each of their original shares. For instance, an exchange ratio of 1-for-2 means one share of the acquiring company is given for every two shares of the acquired company.
When an acquisition involves a mixed consideration of cash and stock, a portion of the acquired company’s shares is exchanged for cash, and the remaining portion is converted into shares of the acquiring company. In all acquisition scenarios, once the deal is complete, the acquired company’s stock is canceled and delisted from stock exchanges, no longer existing as a separate publicly traded security.
Tax Implications for Shareholders
Shareholders of an acquired company face tax implications on any gains or losses realized from the transaction. When shares are exchanged for cash, this results in a taxable event, and shareholders may incur capital gains tax on the appreciation of their investment. The amount of tax owed depends on whether the gain is classified as short-term or long-term. Short-term capital gains, from assets held for one year or less, are taxed at ordinary income tax rates, which can range from 10% to 37% depending on the individual’s income bracket for 2024 and 2025.
Long-term capital gains, on assets held for more than one year, qualify for lower tax rates of 0%, 15%, or 20%, also varying by income level. If the acquisition involves an all-stock exchange, the transaction might qualify as a tax-free reorganization under Internal Revenue Code Section 368, provided certain conditions are met. In such cases, the tax on the stock portion of the consideration may be deferred until the new shares are eventually sold.
For mixed cash and stock acquisitions, shareholders may recognize a partial capital gain on the cash portion received, while the stock portion could qualify for tax deferral. The tax basis of the original shares is allocated between the cash and new stock received. Consulting a tax professional is advisable to understand specific tax consequences, as treatment can be complex and depend on individual circumstances.
Shareholder Engagement During an Acquisition
Shareholders play a role in the acquisition process, primarily through communication and potential voting. Upon the announcement of an acquisition, shareholders often receive official communications from the company or their brokerage firm. These communications may include proxy statements, which provide detailed information about the proposed merger agreement and any related matters requiring a shareholder vote.
In many acquisition scenarios, particularly statutory mergers, shareholder approval is required to finalize the deal. Shareholders will be asked to vote on the merger agreement, requiring approval from a majority of the outstanding shares of the target company.
A tender offer is another common procedural aspect, where the acquiring company makes a public offer to purchase a defined quantity of shares directly from the target company’s shareholders at a specified price. Shareholders decide whether to “tender,” or offer, their shares for sale during an offer period, which must remain open for at least 20 business days. Shares in brokerage accounts are exchanged automatically based on deal terms, with cash or new shares deposited directly.