What Happens to Stocks When One Public Company Buys Another?
When one public company buys another, stockholders in the company being acquired will generally be compensated for their shares. This can be in the form of cash or in the form of stock in the company doing the buying. Either way, the stock of the company being bought will usually cease to exist.
When a public company gets bought out, the stock will no longer exist for the company being bought. The stockholders can expect compensation either in the form of a stock-for-stock deal, cash payout or hybrid deal.
Understanding Stock-for-Stock Deals
In some mergers, the acquiring company will compensate shareholders in the company it is buying by giving them stock. In such a case, each share in the company being bought will effectively be replaced in your brokerage account with a certain number of shares in the company doing the buying. The ratio of shares might not be one to one, depending on factors like the relative share prices of the two businesses.
If you ultimately sell the new stock after the deal is done, you'll have to consult documents filed by the companies with the Securities and Exchange Commission or work with your broker or tax adviser in order to calculate how much you made on the stock, since your original cost basis will be complicated by the merger.
Often, once a stock-for-stock acquisition is tentatively announced, the stock prices in the two companies will converge to something close to the planned ratio, effectively adjusted to take into account investors' sense that the deal might fall through.
Understanding Cash-for-Stock Deals
In other cases, a company acquiring another will pay cash in the transaction, essentially buying out the existing shareholders at an agreed upon price. This is common when a privately held firm, like a private equity fund, buys a public company, but it can happen when one public company buys another as well.
In these situations, your stock in the company will be replaced with money in your brokerage account. You will usually have to pay tax as if you had chosen to sell your stock on the date of the acquisition.
Exploring Hybrid Arrangements
Companies are also able to offer investors a mix of stock and cash in an acquisition, so each share will be traded for a mix of stock in the new company and cash. In some cases, investors may be offered a variety of options to choose from. Your confidence in the acquiring company, your desire for cash and the tax ramifications of taking cash versus stock are some factors you can use to help decide which option to take if this happens to you.
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Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.