Question of the Week: What happens to my shares if a company merges or is taken over?

Submitted by nsscadmin on

Last week we wrote about what happens to your shares if a company you’re invested in files for bankruptcy. That led to another question, what happens to the shares in a company if that company merges with or is taken over by another company?

When this occurs one of three things usually happens to shareholders of the soon to be defunct company.

    1. They’ll receive stock in the new company in exchange for their current shares

    2. They’ll receive cash for their shares

    3. They’ll receive a combination of new shares and cash

    Let’s look at how each might work.

    They’ll receive stock in the new company in exchange for their current shares

    If the shareholders are offered stock in the new company, or the company that remains following the takeover, they will exchange their current shares for new ones at a set ratio. For example, they could receive one share in the new company for every two shares they currently own. If they own 1000 shares in the old company, they will receive 500 shares in the new company. The exact ratio is determined by the price of their old stock once it has ceased trading compared to the offering price made by the new company.

    They’ll receive cash for their shares

    In this circumstance the acquiring company agrees to pay former shareholders a specific amount per share. In our example above where the shareholder owns 1000 shares they would receive $5000 if the new company offered shareholders $5 per share owned.

    They’ll receive a combination of new shares and cash

    Here a shareholder is given the option of taking both new stock and cash for their old shares. Continuing to use our example of 1000 shares, they could be offered $2.50 and 0.5 shares for every share they hold.