What Happens to Employee Stock After an Acquisition?

Discover how stock prices react when a company is acquired. Understand the implications for investors and what to expect.

By Farther

You own stock in a company and just heard it's being acquired—what does that mean for your investment? Many people wonder what happens next and how it affects their holdings.

Your stock won't simply disappear. Its outcome depends on the terms of the acquisition deal. In this post, we'll walk you through what to expect, how it may impact your stock's value, and what it means for you as a shareholder.

Stock Price Movements During an Acquisition

When a company is bought, its stock price usually goes up. On the other hand, the acquiring company's stock could go either way—up if investors like the deal, or down if they don't.

Target Company's Stock

Share prices typically rise when another company decides to buy a firm. This happens because the acquiring company usually pays more than the current market price for each share.

For example, if a share was worth $10 and an acquiring company offers $15 per share, the stock price of the target company would likely rise closer to $15. Shareholders of the target company see this as good news because they can sell their shares at a higher price.

After a merger or acquisition deal is announced, trading of the target company's stock becomes very active. Investors rush to buy or sell shares based on the proposed acquisition price.

The final increase in stock value depends on how well investors think the deal will benefit both companies involved. If shareholders approve, those holding shares in the target company may receive cash payouts or new shares in the acquiring firm—sometimes both—depending on how they structured their deal.

Acquiring Company's Stock

The stock of the acquiring company often reacts to the news of a deal. Sometimes, it will rise, reflecting investor confidence in the acquisition. Other times, it may drop due to fears or uncertainty about the costs involved.

The market wants to know how this buy will affect future profits.

If investors think that paying cash is a good move, they might drive up the price. But if they worry about debt or integration challenges, stocks may fall. Acquiring companies can also issue new shares as part of an all-stock deal.

This increases their shares in circulation and might dilute existing shareholder value.

Investors should stay tuned during these changes.

Types of Acquisition Deals

Acquisitions come in different forms. Some deals are all cash, some are all stock, and others mix both.

All-Cash Deal

In an all-cash deal, the acquiring company pays cash for the target company's stock. This means shareholders of the target company receive money instead of shares in the new company.

The cash is usually at a premium to their current stock price.

Target company's shares often rise leading up to the deal's closing date. Shareholders see immediate payout when it completes. They need to consider tax implications since cash received may be taxable as capital gains or ordinary income, depending on their situation.

All-Stock Deal

When companies merge through an all-stock deal, shareholders of the target company receive shares of the acquiring company. The price often reflects a proposed value based on stock prices at the time of the deal.

For example, if Company A buys Company B in an all-stock acquisition, each share of Company B might convert to a set number of shares from Company A.

This type of merger can be attractive for investors. They don't get cash but gain ownership in a newly combined company. Stock-for-stock conversions typically mean that shareholders must keep track of their new vested options and any changes to vesting schedules after the acquisition closes.

In these deals, it's essential to understand tax implications like capital gains tax applicable when selling your new shares later.

Cash-and-Stock Deal

A cash-and-stock deal combines immediate liquidity with future ownership potential. In this type of acquisition, shareholders of the target company get some money upfront and some stock shares from the acquiring company.

The agreed upon valuation usually sets how much cash they receive.

For example, if a public company buys another firm, target company shareholders may get one share of the new company's stock plus a set amount in cash for each share they own. Stock-for-stock conversions often impact market prices quickly after announcements.

It's important to consider tax implications too; you might owe taxes on both the cash payout and any stock received.

Key Impacts on Shareholders

Shareholders face important changes during an acquisition. They may get cash payouts or new shares, based on the deal's terms and their stock situations.

Stock-for-Stock Conversions

In a stock-for-stock conversion, shareholders trade their old shares for new ones. This happens during a merger or acquisition. When the acquiring company buys the target company, it often offers its own stock in exchange for the target's stock.

The proposed price is usually based on an exchange ratio.

This means if you hold shares of the target company, you will receive shares of the acquiring company instead. The basis of these new shares will generally be the same as the basis of the original shares exchanged, not the fair market value at the time of conversion.

Vested stocks are also affected; they may convert into options in line with a new vesting schedule set by the acquiring firm. Keep in mind, cash payouts might occur too, especially if it's part cash and stock deal.

Cash Payouts

Shareholders may receive direct payments during an acquisition. Shareholders of the target company might receive cash instead of new shares. This usually occurs in all-cash deals, where the acquiring company buys out stock at a set price.

For example, if you own stock in a target company that gets bought for $50 per share in cash, you will get $50 for each share you own. This payout is often seen as good news since it provides immediate value to shareholders.

It's important to know that cash payouts are typically treated as capital gains and are subject to capital gains tax based on the difference between the cash received and your basis in the stock. You might need to pay taxes on any gains from this transaction, especially if they exceed your original investment costs.

Tax Implications for Shareholders

Tax consequences vary widely for shareholders during an acquisition. If a company gets bought, you might receive cash or stock. This decision affects your taxes differently. Cash payouts are typically treated as capital gains, where taxes are based on the difference between the cash received and your basis in the stock.

You may need to pay taxes right away on that money.

Stock-for-stock mergers have different rules. Here, you trade shares of the old company for shares of the new one. This exchange can be tax-free if certain conditions are met. Your basis in the new shares is generally the same as the basis of your original shares exchanged.

Unvested stock options also come with tax issues; they could create a taxable event when they vest or get exercised after an acquisition. Getting professional advice from a tax advisor is wise to understand these details clearly.

Work With a Financial Advisor to Navigate Company Mergers & Acquisitions

If your company is acquired, your stock's fate depends on the deal structure—whether it's a cash buyout, stock swap, or other arrangement.

It is crucial to understand the tax implications, such as ordinary income tax or capital gains tax, the impact on vesting schedules, and potential gains or losses, including possible alternative minimum tax (AMT) liabilities for stock options.

A Farther financial advisor can help you assess your options, minimize taxes, and develop a strategy to protect your financial future.

Don't leave your equity to chance. Talk to an advisor today to create a plan that works for you.

Conclusion

When a company is acquired, everything changes for your stock. You've seen how the target company's stock may rise, while the acquiring company's stock can fluctuate based on market perception. Different deal structures—cash-only, stock-only, or hybrid approaches—each bring unique consequences for shareholders.

Understanding these effects is key for managing your investments wisely. If you want to learn more about mergers and acquisitions, check out finance blogs or investment courses online.

Take control of your portfolio today!

FAQs

1. What happens to my stock when the company is bought?

When a company is acquired, different scenarios can play out for your stock. It could be converted into cash, replaced with shares in the acquiring company, or a combination of both depending on the deal's terms.

2. How does an all-stock acquisition affect my stocks?

In an all-stock acquisition, your shares are typically exchanged for those of the acquiring company based on a set ratio. The target company's stock price usually fluctuates as this occurs.

3. What happens to my employee stock options if our private company gets bought?

If your private company is purchased and you have vested shares or unvested options, they might accelerate vesting schedules or convert them into equity awards in the new firm - it depends on factors like double trigger provisions and equity compensation agreements.

4. Are there tax implications when a public company's stock I own changes due to an acquisition?

Tax implications, including ordinary income tax, capital gains tax, and potential alternative minimum tax (AMT) liabilities, might arise from acquisitions that alter your holdings' value—like exercising options at strike prices below purchase prices—or receiving cash instead of stocks during an all-cash deal. Crucially, exercising incentive stock options (ISOs) can trigger AMT liabilities if the fair market value at exercise exceeds the strike price, even if the shares are not sold.

5. Is it always bad news for shareholders when their companies get acquired?

Not necessarily! It's often good news because target companies' share prices tend to rise post-acquisition announcement—it signifies a liquidity event where investors can sell off their stakes at favorable rates.

6. Does every shareholder need to approve before their public-owned corporation merges with another?

In most cases, a majority of common shareholders must agree before significant corporate actions like mergers or acquisitions can proceed, but specific thresholds and requirements can vary based on state law and the company's bylaws. Some transactions may not even require shareholder approval, depending on the corporate structure and the nature of the deal.

Important Disclosure

This document is for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Farther Financial Advisors, LLC or any of its subsidiaries or related entities to participate in any of the transactions mentioned herein. All sources of information used are deemed reliable and accurate at the time of printing. Advisory services are provided by Farther Finance Advisors LLC, an SEC-registered investment advisor. Investing in securities involves risk, including the potential loss of principal. Before investing, consider your investment objectives, as well as Farther Finance Advisors LLC’s fees and expenses. Farther Finance Advisors, LLC does not provide tax or legal advice; please consult your tax and legal professionals for guidance on these matters.

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