As an investor, a buyout offer for a stock you own is usually a reason to celebrate. A company is usually bought out at a significant premium to the share price before the offer was made. After your shares have made that big jump in value, you need to decide whether you want to stay or jump yourself.
Types of Buyout Offers
When one company makes a buyout offer on another and then completes the deal, the transaction can take one of several different forms. An all-stock buyout involves swapping shares of the buying company for the shares of the company being purchased. Investors who go through with the buyout end up with shares in the purchasing company. A buyout can be for cash, with the acquiring company paying a fixed price per share for the company being acquired. Also, a buyout can be a combination of shares and cash, leaving you with shares of the acquiring company and putting some cash into your brokerage account.
Time For Deal to Close
It can take several months from the time one company makes a buyout offer for another until the deal closes. Typically, the share owners of the target company must vote on whether to accept the offer. When the buyout offer is made, the share price of the company being bought usually jumps up to a price close to the buyout value and will stay there until the deal closes. An extra bonus for investors can occur if another company comes in with a higher buyout bid. That can produce a bidding war and the price of your shares can continue to rise until one of the suitors is the winner.
Your Investment Goals
Most stock buyouts leave investors with shares of the purchasing company in exchange for the stock of the target company. You need to decide if you want to own shares of the purchasing company or prefer to take the value of the buyout and invest your money elsewhere. If it seems that there may be resistance to the buyout from shareholders, you may want to sell your stock to lock in the profit from the buyout offer price jump. However, in most cases you have time to evaluate the offer and either go with the new company or sell your shares before the deal closes and invest your money elsewhere.
In a stock-for-stock buyout, you will receive the shares of the buying company without any immediate tax consequence for you. Your cost basis in the stock you own transfers to the new shares you will receive; no taxes are due until you sell the new shares. If you choose to sell your stock that is about to be purchased, you most likely will have a capital gain, which must be reported on your tax return for the current year. If you owned the shares for longer than one year, the gain will qualify for the lower, long-term capital gains tax rates.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.