Stock-For-Stock

One thing to consider when the company in which you own stock is considering a merger is to be aware of the type of transaction that will take place as the shares are directly influenced. A stock-for-stock transaction is one option that might be presented. This is where the two companies merging will exchange their shares at a certain ratio. This example explains a stock-for-stock merger:

1. One company will agree with the second company on a 1-for-2 merger.
2. The people who hold stocks in the second company will get one share of the first company for every two shares that the original person involved holds.
3. The shares of the second company will stop trading.
4. The outstanding shares of the first company will then rise in value.
5. The first company’s shares will then be reviewed based on the potential earnings for the newly merged company. Sometimes the shares might be more valuable if the revenue potential is higher.

You should be given information before the merger about whether a stock-for-stock transaction is proposed. How does the value of your stock compare with the value of the other stock in question? If your stock is going to stop trading, you should look at whether the new stock is worthwhile. You can get out of a trade if you feel your existing stock is going to be worthless due to the changes taking place. Calculate the total value of your shares versus the value of the new shares.

Cash-For-Stock

A cash-for-stock transaction occurs when a company merges with another with a cash agreement. This could also happen if a larger company uses that cash to buy the smaller business outright instead of going through a merger. A cash-for-stock transaction occurs when:

1. The first company will pay a certain amount for each share of the second company.
2. The second company’s share price will increase.

For instance, the first company will spend $25 per share for the other business. This will cause an increase of $25 per share for that other business if the second company’s shares are of a lesser value. There is a catch to this. The increase is also based on just one company initiating the merger or takeover. That total might be even higher if another company is vying for the same takeover.

1. As the merger or takeover occurs, the second company’s stock will stop trading. At this point, the people who had that stock would have to sell. The addition to its value is at least a good farewell gift of sorts.
2. The first company’s stock might also decline in value depending on the uncertainty of the merger.

Your strategy, in this case, will vary based on which stock you have. First, we should look at what to do if you have stock in the company that is completing the acquisition. In this case, you should sell the stock before the merger takes place. This keeps you from possibly suffering from a sizable drop in the value of the stock after the merger.

Second, consider what you can do if your stock is in the company being acquired or will have its stock stop trading. It is fine to sell the stock after the value goes up. At this point, you are simply getting a good return on the stock. This might be the best case scenario for you if you have a stock that is going through a merger.

In the second instance, you might have to hold the stock before that bonus can be given to you. This requirement is to keep the process of providing money to investors fair. The people who invested in the business before the transaction went through are clearly the ones that deserve the benefits of the overall process.