What happens to stockholders when a company merges?
Stockholders may receive stock, cash or a combination of cash and stock during a merger. A corporate merger can result in a variety of actions for shareholders. In many cases, shareholders will receive stock, cash, or a combination of the two. Companies in stock-for-stock mergers agree to exchange shares based on a set ratio.
What is a stock-for-stock merger?
First, let's be clear about what we mean by a stock-for-stock merger. When a merger or acquisition is conducted, there are various ways the acquiring company can pay for the assets it will receive. The acquirer can pay cash outright for all the equity shares of the target company, paying each shareholder a specified amount for each share.
What is an example of a 1-for-2 stock merger?
For example, Company A and Company E form an agreement to undergo a 1-for-2 stock merger. Company E's shareholders will receive one share of Company A for every two shares they currently own in the process.
What happens to stock prices after a cash merger?
If X and Y shares are trading at $20 and $8 pre-merger, respectively, X shares may drop to $18 after the merger announcement because of dilution fears, and Y shares may rise to $9 to reflect the exchange ratio. In cash mergers or takeovers, the acquiring company agrees to pay a certain dollar amount for each share of the target company's stock.
What Is a Stock-for-Stock Merger?
Understanding Stock-for-Stock Mergers
A stock-for-stock merger occurs when shares of one company are traded for another during an acquisition. When, and if, the transaction is approved, shareholders can trade the shares of the target company for shares in the acquiring firm's company.
Example of a Stock-for-Stock Merger
There are various ways an acquiring company can pay for the assets it will receive for a merger or acquisition. The acquirer can pay cash outright for all the equity shares of the target company and pay each shareholder a specified amount for each share.
Stock-for-Stock Mergers and Shareholders
A stock-for-stock merger can take place during the merger or acquisition process. For example, Company A and Company E form an agreement to undergo a 1-for-2 stock merger. Company E's shareholders will receive one share of Company A for every two shares they currently own in the process.
Special Considerations
When the merger is stock for stock, the acquiring company proposes payment of a certain number of its equity shares to the target firm in exchange for all of the target company's shares.
Chinese Tutoring Companies Take Big Financial Hit Amid Crackdown
A stock-for-stock merger is attractive for companies because it is efficient and less complex than a traditional cash-for-stock merger. Moreover, the costs associated with the merger are well below traditional mergers.
TAL Education Group Announces Unaudited Financial Results for the Third Fiscal Quarter Ended November 30, 2021
New Oriental, TAL and Gaotu Techedu reported heavy losses after Beijing banned for-profit tutoring for most school-age children, showing the large financial toll of the crackdown on the industry.
Stock-for-Stock
TAL Education Group (NYSE: TAL) ("TAL" or the "Company"), a smart learning solutions provider in China, today announced its unaudited financial results for the third quarter of fiscal year 2022 ended November 30, 2021.
Cash-for-Stock
Companies in stock-for-stock mergers agree to exchange shares based on a set ratio. For example, if companies X and Y agree to a 1-for-2 stock merger, Y shareholders will receive one X share for every two shares they currently hold.
Receiving a Combination of Cash and Stock
In cash mergers or takeovers, the acquiring company agrees to pay a certain dollar amount for each share of the target company's stock. The target's share price would rise to reflect the takeover offer. For example, if company X agrees to pay $22 for each share of company Y, the share price of Y would rise to about $22 to reflect the offer.
Understanding a Reverse Merger
Some stock mergers result in a new entity. For example, companies X and Y could merge to form NewCo, with X and Y shareholders receiving NewCo shares based on their prior holdings. Merger agreements sometimes give shareholders a choice of receiving stock, cash or both.
This linkup between REITs has some clear synergies
A reverse merger is when a public company -- usually operating as a shell company with limited operations -- acquires a private company, which secures access to the capital markets without having to go through an expensive initial-public-offering process.
An unusual merger: 2 REITs enter and 2 REITs leave
Began my career as a trader for NYC hedge fund Elliott Management. Worked for Bear, Stearns in London as a trader, then became an analyst at several hedge funds. Currently CFO for a mortgage bank. Also author a daily blog on real estate called The Daily Tearsheet www.thedailytearsheet.com
Realty Income can borrow at lower interest rates
Investors will receive 0.705 shares of Realty Income for every share of VEREIT they hold. Immediately after the merger transaction closes, the combined company will spin off all of its office property assets in a new company, which will be a taxable event for shareholders.
Selling Your Company: Merger vs. Stock Sale vs. Asset Sale
The merger will result in a company with a geographically diversified portfolio of 10,300 properties. Realty Income's stronger investment rating will allow the new company to refinance VEREIT's debt at better rates, which is one of the key synergies for the transaction.
Merger
If you are thinking about selling your company (see also Getting Ready for an M&A exit and Negotiating a Term Sheet ), you should carefully consider how to best structure the sale. Below is a quick primer on some of the advantages and disadvantages of the most common acquisition structures: mergers, stock sales and asset sales.
Stock Sale
A merger consolidates two companies that are distinct legal entities into a single legal entity that holds the combined assets and liabilities of the original companies. In the most common type of merger, a “reverse triangular merger”, a buyer creates a wholly-owned subsidiary company (a “merger sub”).
Asset Sale
In a stock sale, the buyer simply purchases the outstanding stock of your company directly from each stockholder. The legal status of your company remains the same and the name of your company, operations, contracts, etc., all remain in place unless otherwise contemplated by the acquisition agreement.
Further Considerations
In an asset sale, a buyer can buy some or all assets of your company. Assets can be in all kinds of forms, including intellectual property rights or contracts. Similarly, the buyer may assume none, some, or all of the liabilities of your company, and any liabilities not assumed by the buyer will remain with your company post-closing.
What Are Tag-Along Rights?
Understanding Tag-Along Rights
- Tag-along rights are pre-negotiated rights that a minority shareholder includes in their initial issuance of a company's stock. These rights allow a minority shareholder to sell their share if a majority shareholder is negotiating a sale for their stake. Tag-along rights are prevalent in startup companies and other private firms with considerable u...
Advantages and Disadvantages of Tag-Along Rights
- One of the most basic advantages of using tag-along rights is that it gives the business' minority shareholders (including, sometimes, employees given stock ownership) financial and legal protection when the company is being sold. When a sale is proposed, minority shareholders typically don't possess enough bargaining power and legal knowledge to properly negotiate for …
Example of Tag-Along Rights
- Co-founders, angel investors, and venture capital firms often rely on tag-along rights. For example, let's assume that three co-founders launch a tech company. The business is going well, and the co-founders believe that they have proved the concept enough to scale. The co-founders then seek outside investment in the form of a seed round. A private equity angel investor sees the val…
Tag-Along Rights FAQs
- What Is the Difference Between Tag-Along Rights and Drag-Along Rights?
Tag-along or co-sale rights are essentially the opposite of drag-along rights. Whereas tag-along rights give minority shareholders negotiating rights in the event of a sale, drag-along rights force the minority shareholders to accept whatever deal is negotiated by majority shareholders. - Do Tag-Along Rights Make it Easier or Harder to Sell Shares in a Company?
In some instances, tag-along rights can make the selling process more difficult. It becomes harder to complete the sale when the potential buyer doesn't want to increase or change the terms of their offer in order to please minority shareholders.
What Is A Stock-for-Stock Merger?
Understanding Stock-for-Stock Mergers
- There are various ways an acquiring company can pay for the assets it will receive for a merger or acquisition. The acquirer can pay cash outright for all the equity shares of the target company and pay each shareholder a specified amount for each share. Alternatively, the acquirer can provide its own shares to the target company's shareholders according to a specified conversion ratio. Thu…
Example of A Stock-for-Stock Merger
- A stock-for-stock merger can take place during the merger or acquisition process. For example, Company A and Company E form an agreement to undergo a 1-for-2 stock merger. Company E's shareholders will receive one share of Company A for every two shares they currently own in the process. Company E shares will stop trading, and the outstanding shares of Company A will incr…
Stock-for-Stock Mergers and Shareholders
- When the merger is stock for stock, the acquiring company proposes payment of a certain number of its equity shares to the target firmin exchange for all of the target company's shares. Provided the target company accepts the offer (which includes a specified conversion ratio), the acquiring company issues certificates to the target firm's shareholders, entitling them to trade i…
Special Considerations
- A stock-for-stock merger is attractive for companies because it is efficient and less complex than a traditional cash-for-stock merger. Moreover, the costs associated with the merger are well below traditional mergers. Additionally, a stock-for-stock transaction does not impact the acquiring company's cash position, so there is no need to go back to the market to raise more c…
Stock-for-Stock
Cash-For-Stock
- In cash mergers or takeovers, the acquiring company agrees to pay a certain dollar amount for each share of the target company's stock. The target's share price would rise to reflect the takeover offer. For example, if company X agrees to pay $22 for each share of company Y, the share price of Y would rise to about $22 to reflect the offer. The price could rise even further if a…
Receiving A Combination of Cash and Stock
- Some stock mergers result in a new entity. For example, companies X and Y could merge to form NewCo, with X and Y shareholders receiving NewCo shares based on their prior holdings. Merger agreements sometimes give shareholders a choice of receiving stock, cash or both. For example, X could offer Y shareholders the option of receiving $20 in cash, one X share for every two Y sha…
Understanding A Reverse Merger
- A reverse merger is when a public company -- usually operating as a shell company with limited operations -- acquires a private company, which secures access to the capital markets without having to go through an expensive initial-public-offering process. The acquired company's shareholders and management exchange their shares for a controlling interest in the public com…