10 Things Small Investors Should Know About Big Corporate Mergers

If you're a daily reader of financial news, you know there's always a big story about two companies looking to merge. The latest news has Kraft Heinz pulling out of a whopping $143 billion deal with Unilever.

Usually, when news of these potential deals emerge, company executives will use buzzwords like "synergies" and "profit acceleration" to tout the virtues of an acquisition. But what do these mergers mean for shareholders?

Here are some key things you need to know about the flurry of corporate buying and selling activity.

1. Sometimes they're great

There are some mergers that will go down in history as tremendous success stories for both the companies and their shareholders. In an ideal world, the two merging companies complement each other perfectly, and shareholders benefit as revenues and profits take off. The ExxonMobil merger in 1999 is perhaps the best example from recent history of two companies getting together and making it work. SiriusXM Radio, Disney-Pixar, and JPMorgan Chase also worked out great for most parties involved.

2. Sometimes they're awful

We all remember the epic disaster that was the merger of AOL, the internet and email provider, with cable company Time Warner. The $164 billion deal took place in 2000, but things quickly went south after the dot-com bubble burst a year later. The promised "synergies" — you hear that word a lot when people talk about mergers — never materialized, and Time Warner finally spun off AOL back into its own company in 2009.

Other bad mergers include Sears-Kmart, Daimler-Chrysler, and Quaker Oats' doomed purchase of Snapple.

3. You can end up with shares or cash or both

Mergers and acquisitions can happen in different ways, with different impacts on the investor. If you already own shares of Company X, and that company buys Company Y, you can end up with shares of the new combined company. This is known as a "stock for stock" deal. If you own share of the company being acquired, you may receive shares or end up with cash in exchange for your shares.

4. Talk of mergers can boost stock prices

Sometimes you'll see shares of a company shoot up based on mere speculation about a merger. If investors think a company may be sold at a premium, they may flock to buy shares to take advantage. Shares may shoot up immediately if the actual details of a proposed sale are made public. For example, let's say Company X is trading at $25 per share. Now let's say Company Y is willing to pay $35 per share for Company X. Investors will usually see the share price jump close to the proposed sale level.

5. Mergers can lead to spinoffs

Occasionally the combining of companies can often mean the creation of new ones. Sometimes a company will agree to buy another if one portion of the company can be "spun off" into a separate firm. Often, this is done because certain operations may not fit in with the merged company's core business, or to satisfy regulators.

Tyco is one company that got big in part due to mergers, then spun off its electronics, health care, and fire safety and security divisions into three separate companies.

When this happens, shareholders will often end up with some shares of the newly merged company and the spinoff. And investing in spinoffs can be quite lucrative. One study from Vanderbilt University showed that these companies have consistently outperformed the market over the last 36 years.

6. Investors have a say

You may think mergers happen simply because executives get together and hammer out a deal. But the reality is that shareholders of public companies get to vote on whether a merger happens. This can usually be done by mail, on the internet, or by phone, and your broker will notify you of any upcoming votes.

Every planned merger requires the support of the majority of shareholders, who can evaluate a deal to see if it's in their best interests. This is why some companies are willing to pay a premium per share to make an acquisition happen. It's worth noting, however, that most shareholders will vote based on what management recommends.

7. The government gets a say

Mergers don't just happen because companies want them to. Government regulators will examine every proposed merger to determine what impact it will have on consumers. There are many cases in which mergers and acquisitions have been outright rejected on the grounds that it would lead to a decline in competition. One of the most high-profile rejections was the proposed merger of DirecTV and Dish Network that would have merged the two largest satellite television providers in the U.S.

8. Some mergers are hostile takeovers

The truth about mergers is that there are very few true "mergers" and a lot more acquisitions, in which one company is actually taking over another. And sometimes, these acquisitions happen against the will of the company being acquired. In this case, the company looking to make a purchase goes directly to shareholders, who will have their say. In this case, as an investor, you may get a letter or other notification from a solicitation firm with information about the proposed takeover. Sometimes, the acquiring company will urge shareholders to vote out management in order to make a takeover easier.

9. Determining cost basis can be a headache

If you own shares of a company for a long time, you can see the company be acquired, sold, split into parts, and merged again. So when it's time to sell your shares, it's very difficult to determine how much you actually earned over the years. Your purchase price, known as "cost basis," is important to know in order to pay the right amount of capital gains taxes. But this can be difficult to calculate when there's a flurry of mergers and spinoffs. In this situation, companies often provide guidance on cost basis, but it's important to keep your own meticulous records. When in doubt, hire an accountant to help you figure it all out.

10. You may end up with shares of a company not based in the U.S.

One day you may wake up and realize you own shares of a company based in Ireland. Or Bermuda. Or the Netherlands. This is because many countries overseas have lower corporate tax rates than in America, so it's become common for U.S.-based companies to be acquired by companies based elsewhere.

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