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What Happens To Stocks When Companies Merge?

Merger & Acquisition Deals Handle Stocks In Three Different Ways

Written by Gregory L. Phillips, Founding Partner

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So your company is going through a merger. Regardless of what type of merger it is—conglomerate, horizontal, vertical—you are probably asking, What will happen to our stock? The answer? A few different things could happen.

Typically, mergers and acquisition deals handle stock in three different ways: a stock-for-stock exchange, cash-for-stock exchange, or a mix of cash and stock.

1. Stock-for-Stock

A stock-for-stock exchange, also known as an all-stock deal, is exactly what it sounds like: exchanging stock for stock between the companies involved in the merger. In an acquisition-type merger, where Company A is acquiring target Company B, Company A and Company B may agree upon a stock-for-stock ratio. If that ratio is, say, 1:2, for every two shares a Company B shareholder has at the time of the merger, he will receive one share of Company A.

A stock-for-stock exchange is a cheaper and more efficient way to handle a merger as the acquiring company will not have to raise funds to purchase the target company. Auto companies Fiat Chrysler and France-based PSA, the parent company of Peugeot, recently announced their plans to merge under an all-stock agreement.

2. Cash-for-Stock

A cash-for-stock exchange is also what it sounds like: one company paying cash for the other company’s stock. In this scenario, the acquiring company will buy the shares of the target company’s stock at an agreed-upon price. The target company’s shareholders will receive cash for their shares.

3. Cash-and-Stock

When two companies merge to form a new company, they may offer shareholders a choice of receiving cash for their shares or receiving part cash and part stock. For example, Company A might offer shareholders of Company B an option of either receiving $30 per share or $15 plus a percentage of A-shares for every B share they own.

The major Disney acquisition of Marvel in 2009 was a cash-and-stock deal, originally set at $30 in cash and .745 of a share of Disney for each Marvel share, though the tumultuous market of 2009 would affect those numbers before the sale.

Which brings us to an important question: What happens to stock prices, of publicly traded companies, during a merger? Typically, during an acquisition, the publicly traded target company’s stock goes up. This is because the acquiring company is paying a premium for the acquisition to stay in good faith with the target company’s shareholders. The stock price of the publicly traded acquiring company may temporarily decline due to dilution fears.

Although stock-for-stock, cash-for-stock, and cash-and-stock mergers are the most common ways stock is managed during a merger, a few other scenarios exist. For example, the reverse merger, also known as a reverse takeover, occurs when a public company acquires a private company. In this scenario, the target company’s shareholders would exchange their shares for shares in the public company.

To learn more about different types of mergers, acquisitions and the pros and cons of each, visit our page Mergers & Acquisitions.

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