If you own a stock that is party to a merger, you should be a very happy investor if you have stock in the company being acquired. Whether the merger is paid for with cash or stock, in most cases you'll end up with a nice profit (the average buyout premium is 25 percent) compared to the share price before the merger announcement. The type of buyout -- stock, cash or a combination -- will affect both your taxes and ongoing investment decisions.
Why Companies Merge
The typical stock market merger happens when a large company buys a smaller one as a way to grow the big business even larger. The offer for the small company usually comes with a buyout price significantly higher than the current share price, giving the smaller company's investors a good reason to go along with the merger and agree to exchange their shares in the merger. The offer to a smaller company to merge businesses can be in the form of a cash value per share, shares of the acquiring company, or a combo stock and cash offer.
Cash for Your Shares
If the merger offer for one of your stocks comes as an all-cash buyout, you can sell your shares right after the offer, or wait until the merger closes and cash is actually paid for your shares. The merger announcement will include an expected completion date. The share price will jump up close to the cash offer value, almost immediately after the buyout bid goes public. However, it may take months for the deal to finalize and you to receive your cash if you hang on to the shares. Some reasons to hold the shares include waiting for a bidding war to break out and you get more for your shares, or to push the cash receipt and tax bill into next year. A cash buyout does come with a reportable tax gain or loss, depending on your cost basis in the shares.
If the merger involves the exchange of shares of the purchasing company for the shares you hold, the decision focuses on the investment potential of the acquiring business, and whether you want to own stock in the company that is absorbing the company you're currently invested in. An advantage of a stock merger is that you receive the new shares tax-free, with your cost basis from the old shares carrying over to the new -- for you -- stock. If you sell shares -- either before or after the merger closes -- you will have a taxable gain or loss depending on what you originally paid for your shares in the company being acquired.
Cash and Stock
A stock plus cash merger offer can seem like the best of both worlds -- you get shares in the acquiring company plus cash into your brokerage account. The tricky part of this type of deal comes with your tax reporting. You must include on your tax return the smaller of the cash you received or your gain on the stock based on the merger value. If you have no gain, you get the cash basically tax-free and your cost basis transfers to the new shares. If things get too complicated you can sell your shares before the merger, put the money to work in another stock you like, and claim your gain or loss when you file taxes.
- United Health GroupL Buyout Offer Tax Examples
- Tax Guide for Investors: Cash Received in Mergers
- MBBP: Top Ten Issues in M&A Transactions
- Weatherhead.case.edu: Stock Market Valuation and Mergers
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- Digital Vision./Digital Vision/Getty Images
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