So, there is a buyout in the company you have stocks in and you’re wondering what comes next, regardless of the process. What is the solution?
Many successful companies use buyouts to expand their operations.
If you have stock options or other equity incentives, you will want to know what can happen if there is a buyout. What stock options and restricted stock units (RSUs) are available after an acquisition?
The two key considerations are the type of equity and whether your grant will mature. This article is a detailed review of what happens to stock when a company is bought. On a side note, we already shared what happens when a company struggles financially, leading to increased shares sales.
What Happens to Your Shares After a Buyout?
What happens to your shares after a buyout or buyback depends on the equity compensation you receive. There are a variety of equities that a company can use to compensate shareholders. They sometimes get different equity-based payments together.
Incentive and non-qualified stock options are standard features of stock plans. Shareholders buy the company’s stock with their own money. After, they exercise their options and sell enough shares to recoup their investment. In publicly traded companies, these options are also available for buying.
A few other common equity compensation options – see also common stocks explained – include restricted stock awards, and (SARs). You don’t have to get a stock deal; they’re part of the package.
The terms of the sale and the impact of the buy price on the prices of the stock prices are also key factors to consider when deciding to trade. A third element is the takeover company stock value compared to the target company. Analysts and investors usually monitor any changes in forecasting the company’s expected profitability to then decide on an investment strategy. In case you have made any profit, you should rule out selling the stock to gain even bigger profits.
Do Stocks Go Up After the Buyout?
As soon as a company buys another, the company’s stocks move in the opposite direction. An increase in share price is common when the acquiring company offers a higher price. It helps increase chances for a higher approval rate from target shareholders.
Shareholders have no incentive to consent to a takeover. That is if the proposed price is lower than the target company’s existing market value. A discount can be the only opportunity for shareholders to recover capital. Only if a target company’s stock price has dropped due to poor earnings.
It is common if the target company has debt and can’t access funding to restructure. Often after an acquisition, the stock of the acquiring company declines since they pay a premium. It drains their cash reserves and increases their debt load. The stock price of the acquiring company can fall for several reasons, including:
- Investors think the target company’s premium was too high
- Integration of diverse workplace cultures presents challenges
- Regulatory components make the buyout process more difficult
- Power conflicts in management limit productivity
- The buyout results in debt or unexpected costs
Although the acquiring company may see its stock price fall, its share price should rise in the long run, meaning you should hold on to them. The point is if you buy these stocks during their low moments (check out small-cap stocks in Canada and Penny Stock Canada) that will ensure you get the biggest returns on your investment. However, it depends if the management integrates the stock mergers well.
Is a Company Buyout Good for Shareholders?
First, a takeover bid is good news for the company’s stockholders. Suitors often pay a premium above the current market price. It helps to assure that shareholders vote in favor of the buyout.
As soon as the buyout news is public, it’s usually a perfect moment to cash out for short-term investors. However, long-term investors (see blue-chip stocks) may worry about the stock market if the shares are not up for sale.
To begin with, it can sometimes take a while for anything to happen at all. Once a deal is public, shareholders must vote to confirm it. Authorities must also approve it before going through.
Next, the buyout’s conditions will dictate how the situation plays out. Your stock will disappear from the owner’s portfolio after the deal’s official closing date. Only if the buyout offer is all-cash. The cash value of the shares stated in the buyout will replace your stock shares.
A company’s shares will exchange all new stock deals with the buyer’s shares. The old-to-new share ratio is rarely one-to-one. As is customary, many transactions involve a combination of cash exchange and shares.
Equity in a Buyout: Vested vs Unvested Shares
Stock options and RSUs are either vested or unvested, depending on how long they have been. It is common for grants to come with a vesting timetable. Stocks or cash are the most common forms of payment for RSUs and restricted stock awards when they vest. As a result, if you still have any equity in your company, you are likely unvested.
Option holders and anyone with stock appreciation rights are eligible to exercise options once they have vested. Shareholders cannot exercise stock options after they learn of a takeover. There are various restrictions on this.
It means that if you haven’t earned the shares, you haven’t done so under the original “pre-deal” vesting plan. The status of your options, whether vested or unvested, affects what happens to the stock.
What Vested Stock Options Are There After Buyout?
Vested shares show that you have the option to trade the shares or offer cash compensation for them. The acquiring company often handles vested stock in one of three ways:
1. Calculate the value of your options
The amount you get depends on your current strike price, the new price per share, and any other company’s payment terms. However, the result will be the same, to sell your stock.
2. Replace your stock options
The new company may take over the value of your vested options or replace them with their own. Either way, you should be able to keep your equity awards or exercise them as you see fit.
3. Cancel ‘underwater’ vested grants
If the current market value of an equity award is less than the exercise price, it is “underwater.” The stock’s “exercise” or “strike” price is the amount you would have to pay to acquire it. Stock appreciation rights, non-qualified, and incentive stock options, are only a few examples.
Because vested shares are worthless, the acquiring company would not want your grant. In exchange for canceling the stock award, the acquiring company can offer shareholders a small sum. The distribution of restricted stock units to stockholders ensures they cannot default.
What Happens to Unvested Stock Options or RSUs?
Unvested stock options and restricted stock units (RSUs) put investors and brokerages at a disadvantage. Any unvested stock option can have three outcomes:
1. Cancel non-vested grants
The acquiring company can cancel the existing unvested grants because you didn’t “earn” the shares. For example, concerns about diluting existing shareholders. Also, the company’s inability to raise enough money through new debt issues are common financial reasons. On the other hand, companies often need to raise capital to expand their projects as we already explained in the Canada Nickel post.
Depending on your strike price, you may not know if your vested or unvested grant will be underwater when the transaction is complete. It all depends on the conditions of the agreement, such as the dividends paid to shareholders (see also dividend tax and taxable capital gain). Stock options that have not yet vested are most likely to go without a payout.
2. Fully speed up your vesting
An acquiring company can speed the vesting options for a payment in cash. Depending on the type of stock or grant, acceleration of vesting may not be available. Depending on the incentive plan, this approach could apply to all shareholder stock options or only a section of them.
3. Replace unvested options
The new company could replace your existing unvested stock options or RSUs. It also applies to vested options. You would still have to wait to buy shares, get cash, or keep your unvested stock.
The Bottom Line
To some extent, how a buyout looks determines what happens to your stock options. Many challenges are at play, including financial, legal, and retention. This article is a detailed review of what can happen to a company’s stock following an acquisition.
Never buy a stock because you believe it has buyout potential. The key here is to include that idea into your entire investing theory. For that reason, especially if you are a beginner to the stock market, getting a robo advisor to help you make an investment plan could be a great idea.