What Happens to Stock if a Company Is Bought?

When a company is acquired, the status of its shares changes for shareholders. An acquisition involves one company taking ownership of another, which typically leads to the acquired company’s shares being converted into a different form of value or ownership. This alters their investment and has financial implications. The specific outcome for shareholders depends on the structure of the deal and the consideration offered by the acquiring entity.

How Acquisitions Occur

Acquisitions can take several forms, each affecting the target company’s stock. A common method is a merger, where two companies combine to form a single legal entity. Statutory mergers involve the target company being fully absorbed into the acquiring company, and its shares being converted into the acquiring company’s stock or cash. Reverse mergers, on the other hand, often involve a private company acquiring a public “shell” company to become publicly traded without an initial public offering.

Another prevalent acquisition mechanism is a tender offer, where an acquiring company directly offers to purchase shares from the target company’s shareholders at a specified price, usually at a premium. This offer is typically contingent on the acquiring company obtaining a certain percentage of shares to gain control. If successful, shareholders receive the offered payment, and the target company’s stock may then be delisted.

Asset purchases, while less common for acquiring public companies due to complexities with transferring all assets and liabilities, involve the acquirer buying specific assets rather than the company’s stock, leaving the original corporate entity to deal with its remaining assets and liabilities.

Forms of Payment for Shares

Shareholders receive “consideration” in exchange for their shares. This consideration impacts the financial outcome. The three primary forms of payment are all-cash deals, all-stock deals, and mixed consideration deals.

In an all-cash acquisition, shareholders receive a predetermined amount of money for each share they own. This provides immediate liquidity and a certain value. For example, if an acquiring company offers $100 per share, shareholders receive $100 upon the deal’s closing.

Conversely, an all-stock acquisition involves shareholders exchanging their shares for shares of the acquiring company, based on a specified conversion ratio. If the agreement is a 1-for-2 stock merger, for instance, a shareholder receives one share of the acquiring company for every two shares they previously owned. The value of the new shares depends on the market’s reaction to the combined entity. Mixed consideration deals combine both cash and stock, offering flexibility and balancing immediate payout with future participation. Many transactions utilize this structure, with varying proportions of cash and stock.

Impact on Share Trading

An acquisition alters the trading status of the target company’s stock. Once an acquisition closes, the target company’s shares are typically delisted from major stock exchanges, such as the NYSE or NASDAQ. Delisting means the shares can no longer be bought or sold on these public exchanges. This usually occurs shortly after the transaction is finalized and shareholders have received their consideration.

In some cases, particularly during the period between the announcement of an acquisition and its official closing, the target company’s stock might trade at a discount to the offer price, reflecting uncertainties and regulatory processes involved. If a deal falls through, the stock price can drop significantly, often back to or below its pre-rumor levels. While less common for publicly traded companies, in complex transactions or during transition phases, shares might temporarily trade in an over-the-counter (OTC) market before the final exchange of shares or cash occurs.

Shareholder Considerations

Shareholders face actions and decisions during an acquisition process. In many mergers, shareholder approval is required, typically through a vote. Shareholders vote on the proposed transaction, influencing whether the deal proceeds. For tender offers, shareholders must decide whether to “tender” their shares, meaning they agree to sell them to the acquiring company under the terms of the offer. This decision often involves weighing the offered premium against their long-term investment strategy.

A “squeeze-out” or “short-form merger” occurs when a majority shareholder, often holding 90% or more of a company’s stock, forces minority shareholders to sell their shares for cash consideration. This action “freezes out” minority interests, consolidating full ownership. In such scenarios, dissenting shareholders may have “appraisal rights.” Appraisal rights allow shareholders who disagree with the merger terms to petition a court to determine the fair value of their shares. Exercising these rights can be a complex legal process.

Tax Treatment of Proceeds

The consideration received from an acquisition has tax implications for shareholders. Transactions are classified as either taxable or non-taxable. When shareholders receive cash for their shares, this typically results in a taxable event. Any gain, calculated as the difference between the cash received and the shareholder’s original cost basis, is usually subject to capital gains tax. The holding period of the shares determines whether the gain is classified as short-term or long-term capital gain, with different tax rates applying.

In contrast, stock-for-stock exchanges can qualify as tax-deferred reorganizations under Internal Revenue Service (IRS) requirements. Shareholders may not owe taxes until they sell the new shares. The original cost basis generally transfers to the new shares, preserving tax attributes. For deals involving a mix of cash and stock, the cash portion is typically taxable, while the stock portion may qualify for tax deferral. Understanding the cost basis of the original shares is crucial for calculating any taxable gains or losses. This information is for general understanding and does not constitute tax advice; shareholders should consult a qualified tax professional for personalized guidance.