February 24, 2009

Company takeover - Got stock? Should You Sell it?

Barrington’s Blog » 2009 » February: "I was asked a question today by a peer of mine asking what happens to his shares of stock in a company if it is being acquired by another company. Should he sell? Will he lose all of his money? After some research, I told him he should sell. Why? Because usually if there is a risk of a company being bought by another company - the stock price of the acquiring company decreases, and the stock price of the company being acquired increases.
So you have two options:
1. Cash out (sell) your shares and take the money.
2. Purchase shares of the acquiring company
If you take option 1 - then you are subject to capital gains tax which is 15% as of this writing. On the contrary, if you decide option 2 is better - then you avoid capital gains tax, plus you sell your shares at a high price and you have the option to buy stock of the acquiring company at a low price.
In my opinion, option 2 is the win-win. Why would you pay capital gains tax if you didn’t have to?"