Mergers & Acquisitions
Mergers and acquisitions are two ways that companies can be reorganized and restructured. In a merger, two companies combine to form one larger company, while in an acquisition, one company is purchasing another company.
Reorganizations can mean many things for investors. Two of the most common stock reorganizations that take place during mergers and acquisitions are stock-for-stock and stock-for-asset. Cash mergers are also fairly common.
Stock-for-stock reorganization - The acquiring company exchanges shares of their own stock for shares of the acquired company's stock at a predetermined rate. Often, only a portion of the acquisition is completed this way. For example, a company might offer stockholders a two-for-three stock-for-stock exchange and then make a tender offer of cash to the stockholders to cover the remainder of their ownership.
Stock-for-asset reorganization - The acquiring company exchanges shares of their stock for the assets of the acquired company.
Cash merger - Shareholders may receive cash for all of their shares at a predetermined rate.
Although no one buys stock in a company they expect to run into financial trouble, the reality is that some public companies do face bankruptcy and their investors lose all or part of their investment. One action a financially troubled or bankrupt company can take to attempt to revive its business is to undergo a reorganization.
A reorganization allows a company to restate their assets and liabilities and opens communication with creditors to manage debt repayment. It is an attempt to use restructuring and special repayment arrangements to help the company get back on its feet.
What a Corporate Action Means for Your Account
Any kind of corporate action or bankruptcy proceeding can affect a company's investors. Stockholders may be asked to exchange their shares for new shares in the reorganized company, sometimes for less value than their original investment. When a company is reorganized, the rights of investors are spelled out in the reorganization plan.
When mandatory reorganizations and stock spin-offs/splits occur, you may receive new shares from the reorganized company. It is important to note how a corporate action may impact your account.
The process of a corporate action involves the canceling of the old securities in exchange for shares of a new security. Because the old security has been canceled, it is no longer available for trading. A transfer agent will issue shares of the new security in exchange for the canceled shares.
Scottrade will post the new shares resulting from a corporate reaction to your account only after receiving the shares from their depository firm or the transfer agent.
Selling New Shares Resulting From Corporate Action
Scottrade does not allow sales transactions on any unlisted security, which includes trades on the OTC Bulletin Board or the pink sheets, prior to the new shares posting to your account.
If you decide to place a sell order for new shares of a listed security before the shares have been posted to your account, there may be additional risk associated with those shares because:
- The terms of the dividend or reorganization could change (stock, number of shares being delivered, etc.).
- There is a possibility that Scottrade will not receive the shares by the time your order settles. In that case, you would be forced to buy back the shares you sold.