🤝 Mergers, tender offers and spinoffs: what happens to your shares

🎯 In 30 seconds: A corporate action is anything a company does that changes the shares you hold: a merger, a tender offer, a spinoff, a split, a rights offering. Some happen to you automatically (mandatory). Others need you to choose by a deadline (voluntary). In a cash takeover, the target's stock usually trades a bit below the offer price because the deal might fail. In a tender offer you may get only part of your shares bought. In a spinoff you receive shares of a new company and must split your cost basis between the two. Read the notice, know the deadline, and know what happens if you do nothing.

Mandatory and voluntary actions

Your broker will send you a notice for every corporate action on a stock you own. The first thing to check is which kind it is:

• Mandatory: happens to every shareholder the same way. A completed cash merger, a stock split, a spinoff, a ticker change. You do nothing; your account changes on the effective date.
• Voluntary: you choose. A tender offer, a rights offering, an election between cash and stock in some mergers. If you do nothing, you get the default, which is often "nothing happens", and that can cost you.

Brokers usually set their own response deadline a day or more before the official one, so they have time to submit your instruction. The date on your broker's notice is the one that counts for you.

Splits and reverse splits are covered in Dividends, splits and buybacks. This chapter covers the bigger changes.

Mergers and acquisitions

In an acquisition, one company (the acquirer) buys another (the target). Most US public company deals follow the same path: the boards sign a merger agreement, the company files an 8-K about it (often under Item 1.01), shareholders of the target vote, regulators review it, and then it closes. That can take a few months or more than a year.

What you receive as a target shareholder depends on the deal type:

Stock deal example. Company T agrees to be bought for 0.8 shares of Company A per T share. If A trades at $60, each T share is worth 0.8 x $60 = $48. If A falls to $55 before closing, each T share is worth 0.8 x $55 = $44. You are now partly an owner of A, so read A's numbers too. For a stock deal the acquirer files a registration statement (often Form S-4) with a long section on the deal's risks.

The deal spread: why the target trades below the offer

Say hypothetical Company T trades at $40. A buyer offers $50 cash per share. T jumps, but only to $48.50. Why would anyone sell at $48.50 when $50 is on the table?

Because $50 is a promise, not a payment. The deal could be blocked by regulators, voted down, or abandoned if financing falls through. The gap between the offer and the market price is the deal spread. Traders who buy targets to capture it practice merger arbitrage.

You can back out the chance the market is assigning to the deal closing. Call it p. At a fair price, the expected gain equals the expected loss: $1.50 x p = $10.50 x (1 - p). Solving: p = 10.50 / (1.50 + 10.50) = 87.5%. The market is saying roughly seven in eight.

The payoff shape matters: small, likely gain against a large, less likely loss. That is the same shape as selling insurance. It can look smooth for a long time and then hurt badly. Compare this with the risk-reward math in Risk/reward and expectancy.

A cash merger is a sale for tax purposes: you owe tax on the gain in a taxable account. Many all-stock deals are structured so that tax is deferred until you sell the new shares. The merger proxy or S-4 has a section on tax consequences. In some cash mergers, shareholders who do not vote in favor may have appraisal rights under state law, a court process to seek a different price. It is slow and uncertain, and rarely used by small holders.

Tender offers and proration

A tender offer is a public offer to buy shares directly from shareholders, at a fixed price, for a limited time. You choose whether to tender (offer up) your shares. A third party may use one to take over a company quickly. A company may also make an issuer tender offer to buy back its own stock.

The SEC's rules give you protections. Under Rule 14e-1, the offer must stay open at least 20 business days, and if the bidder changes the price or the number of shares sought, it must stay open at least 10 more business days. You can withdraw tendered shares during the offer, every holder of the class must get the same best price, and the bidder files a Schedule TO with the full terms.

If more shares are tendered than the bidder wants, it buys from everyone pro rata:

The 300 returned shares often trade below $30 once the offer ends, because the extra demand from the company is gone. Plan for partial fills.

Spinoffs and your cost basis

In a spinoff, a company turns one of its divisions into a separate public company and hands its shares to existing shareholders. You end up owning two stocks instead of one. The new company usually registers its shares on a Form 10, which reads much like an IPO prospectus, with financial statements for the business being spun off.

Example with hypothetical Parent Co. You own 100 shares, bought at $50, so your cost basis (what you paid, for tax purposes) is $5,000. Parent spins off Spinco at 1 Spinco share for every 4 Parent shares.

Where does the 80/20 come from? Companies report how a corporate action affects basis on IRS Form 8937, which they can post on their investor relations website instead of filing it with the IRS. It is due within 45 days of the action (or by January 15 of the following year, if earlier). Your broker usually updates basis automatically, but check it, especially if you moved brokers. Wrong basis means paying tax on the wrong gain. If the ratio leaves you with a fraction of a share, you typically get cash in lieu of it, which is a small taxable sale.

What happens to options and orders

• Options: listed options on a stock that goes through a merger, spinoff or unusual split are adjusted so the contract keeps its economic value. The Options Clearing Corporation (OCC) publishes an information memo describing the new deliverable. An adjusted contract may deliver "80 shares plus $500 cash" instead of 100 shares, and its quotes can look strange. Read the memo before trading one.
• Open orders: many brokers cancel or adjust good-till-canceled orders around splits, spinoffs and mergers. Check your open orders after any corporate action.
• After a cash merger closes: the stock stops trading and your shares are replaced with cash. There is nothing left to sell.

Try it

Use the paper portfolio to follow a real announced cash deal for a few months without money at risk. Find a recent 8-K announcing a merger agreement, note the offer price and the target's market price, and compute the spread and the implied chance of closing, as above. Each week, record the price. If the deal closes, compare your spread with the time it took. If it fails, note how far the price fell. Then look up the Form 8937 for any recent spinoff on the company's investor relations site and check the basis split.

Sources

• Investor.gov (SEC): Tender Offer
• Investor.gov (SEC): Mini-Tender Offers
• Cornell LII: 17 CFR 240.14e-1, unlawful tender offer practices
• IRS: Instructions for Form 8937