What Happens to Stock When Companies Merge?

When companies merge, the landscape for shareholders shifts, altering ownership and investment value. This process involves financial and legal considerations that affect how stock holdings are treated. Understanding these dynamics is important for navigating merger changes.

Understanding Merger Consideration

Mergers involve various forms of payment or exchange for shares held by investors in the acquired company. The type of consideration determines what shareholders receive.

In a cash merger, shareholders receive a fixed cash amount for each share they own. The offer price often includes a premium over the target company’s market price, incentivizing shareholders to approve the deal. The acquired company’s stock is delisted, and its shareholders receive a specified cash payout per share.

A stock merger involves shareholders receiving shares in the acquiring company, or a new combined entity, in exchange for their original shares. An “exchange ratio” specifies how many shares of the acquiring company are given for each share of the target company. For instance, a 1-for-2 agreement means shareholders receive one share of the acquiring company for every two shares they own in the target company.

Mixed consideration mergers provide shareholders with a combination of cash and stock. The mix might be a fixed amount of cash plus a fixed number of shares.

Shareholder Actions During a Merger

Once merger terms are announced, shareholders typically take specific actions to receive the offered consideration. Shareholders often vote on the proposed merger.

Companies provide proxy materials detailing merger terms, allowing shareholders to cast votes in person, by mail, online, or through proxy. A majority vote is often required for approval.

For cash offers, a tender offer process is common. Shareholders are invited to sell their shares directly to the acquiring company at a specified price within a set timeframe.

An exchange agent facilitates the exchange of shares or distribution of cash. This agent provides shareholders with instructions and necessary forms, such as a Letter of Transmittal. This document confirms ownership and provides instructions for receiving the merger consideration.

Upon completing these actions, shareholders receive their merger consideration. This can involve new stock certificates, electronic deposit of new shares into a brokerage account, or direct deposit of cash.

Tax Considerations for Shareholders

Understanding the tax implications of a merger is important, as treatment varies based on the consideration received. Mergers can be taxable or tax-deferred events.

Cash mergers are generally taxable events. When cash is received, any gain or loss from the sale of shares is subject to capital gains tax.

For stock-for-stock mergers, the transaction can often be tax-deferred, provided certain Internal Revenue Service (IRS) requirements are met. These requirements, outlined in Section 368, ensure a significant portion of the consideration is in stock. In such tax-deferred exchanges, shareholders do not recognize a gain or loss until they sell the new shares received. The original cost basis of the old shares carries over to the new shares.

Capital gains are categorized as either short-term or long-term, determining the applicable tax rate. Short-term gains, from assets held for one year or less, are taxed at ordinary income tax rates. Long-term gains, from assets held for more than one year, typically have lower federal tax rates. Consulting with a tax professional is beneficial for personalized advice regarding merger-related tax consequences.

After the Merger Is Complete

Once a merger closes, the original stock’s status and the shareholder’s relationship with the combined entity transform. Shares of the acquired company are typically delisted from stock exchanges.

Shareholders of the acquired company transition into shareholders of the acquiring company, or they receive cash, depending on the merger’s structure. If a shareholder does not tender their shares or respond to an exchange offer, their shares may be subject to mandatory conversion to cash or new shares by the exchange agent.