Merger deals get worked out by the executives high up in the corporate suite, but their effects reach all the way down to the stockholder level. If you own stock in a business that's about to merge, you may wind up owning shares in something else, or you might wind up with a check. It depends on whether the merger is, well, a merger or not.
Merger or Acquisition
A true merger occurs when two companies come together to form an all-new third company, with the original companies ceasing to exist. But "mergers of equals," as these deals are known, are rare. Most deals that are publicly presented as mergers are in fact acquisitions -- one company is taking over another. They just don't call it an acquisition, which allows the company being bought to save a little face.
Mergers of Equals
In a merger of equals, stockholders of both companies trade in their old stock for shares in the brand-new company. For example, Company A and Company B are merging, with the new company to be called Company C. During the merger negotiations, representatives of both companies will put their heads together to figure out how much each company is worth on its own. Those valuations then determine the distribution of new stock. Assume Company B is worth more than Company A. In that case, Company A's shareholders might get one share of stock in C for every share they owned in A, while Company B's shareholders might get 1.2 shares of C for every share they owned of B.
If the merger is technically an acquisition -- that is, one company buying another -- the acquiring company can pay with stock or cash. In a "stock-for-stock" deal, stockholders in the targeted company give up their shares. In return, they receive a certain number of shares in the acquiring company. For example, Company D is taking over Company E. Stockholders in E might get one share of D for every two shares of E they previously owned. The proportion is calculated during the acquisition negotiations. People who own shares in the acquiring company simply hold onto the stock they already have.
In an "all-cash" deal, one company simply buys all the outstanding stock in the other. For example, Company F wants to take over Company G. If Company G has 100 million shares outstanding, F might offer to buy each share for $15, or a total of $1.5 billion. In that case, shareholders in G come out of the deal owning no stock at all, but they're $15 richer for each share they held. The stockholders in Company F simply hold onto the shares they already have.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.