What Happens When You Own Stock in a Company That Gets Acquired?

When a company you own stock in is acquired, it can significantly impact your investment. Understanding the general process and potential outcomes helps shareholders navigate these changes. The acquiring company typically offers a premium over the target company’s current market value, which often leads to a rise in the target company’s stock price upon announcement. This initial increase can create profitable opportunities for investors.

Types of Acquisitions and Shareholder Impact

Corporate acquisitions come in various forms, each influencing how shareholders’ stock is treated. A common structure is a merger, where two companies combine to form a single entity. Mergers often involve an exchange of shares rather than cash.

Another method is a tender offer, where an acquiring company proposes to purchase shares directly from the target company’s shareholders, typically at a premium price. This approach aims to gain a controlling interest. Asset purchases involve the acquiring company buying specific assets and liabilities, rather than the entire company’s stock. In this scenario, the target entity generally retains its separate existence, and the purchase price is paid to the target company itself, not directly to its shareholders.

What Happens to Your Shares

The fate of your shares in an acquired company depends on the type of consideration offered. In an all-cash offer, shareholders receive a predetermined amount of money for each share they own. Your shares are bought out and replaced by the specified cash value in your brokerage account, providing immediate liquidity.

Alternatively, an all-stock offer means your shares are converted into shares of the acquiring company. This exchange occurs based on a specified conversion ratio, such as receiving one share of the acquiring company for every two shares previously owned. The target company’s shares then cease trading.

A mixed offer provides shareholders with a combination of cash and stock. This hybrid approach allows for both immediate payment and continued ownership interest in the combined entity. The specific ratio of cash to stock is determined by the negotiated terms.

In some cases, a “short-form merger” may occur when a parent company owns a significant majority of a subsidiary’s stock. This process allows the parent to merge without a shareholder vote, with minority shareholders typically receiving a cash payment. These actions, sometimes called “squeeze-outs” or “freeze-outs,” compel minority shareholders to sell their shares.

Tax Implications for Shareholders

The consideration received in an acquisition has specific tax implications. When cash is received for shares, it is generally subject to capital gains tax. This tax is calculated on the difference between the cash received and your original cost basis. The holding period determines whether the gain is short-term or long-term, with long-term capital gains typically taxed at lower rates if shares were held for over a year.

For stock-for-stock exchanges, the transaction may qualify as a non-taxable event, often called a “tax-free reorganization,” under specific Internal Revenue Service (IRS) rules. Tax is deferred until the new stock is sold. The original cost basis of your old shares generally carries over to the new shares. However, if cash or other non-stock consideration, known as “boot,” is received alongside the stock, that portion is typically taxable at the time of the exchange.

When an acquisition involves mixed consideration (cash and stock), the cash portion is generally taxable, while the stock portion may qualify for tax deferral. Tax situations are individualized, and consulting a qualified tax professional is advisable to understand the specific implications for your circumstances.

Shareholder Actions and Timelines

During an acquisition, shareholders receive important communications from the companies involved and their brokerage firms. These communications often include proxy statements, which detail the proposed acquisition and may request a shareholder vote.

If the acquisition is structured as a tender offer, shareholders receive documents explaining the process of “tendering” their shares, meaning formally offering them for sale to the acquiring company. Shareholders need to be aware of key dates, such as vote deadlines and the acquisition’s closing date. Once the transaction closes, shares in the acquired company are typically replaced by either cash or new stock in the shareholder’s brokerage account, usually without requiring direct action. Shareholders should review all provided materials carefully to understand their options and any necessary steps.