What Happens to Stocks When Companies Merge?

Stock options are often a critical part of compensation packages. Yet, in the face of a business exit, you need to ask what happens to your stocks when companies merge.

Here are eight ways to make the most of your stock options during a merger and why working with a financial advisor with direct expertise can help maximize your financial outcome.

1. Review vesting acceleration clauses

Many stock option plans include acceleration clauses that speed up the vesting of unvested options in case of a merger or acquisition. 

There are typically two types: 

• Single-trigger acceleration: Unvested options vest immediately upon closing a merger and acquisition (M&A) deal. 
• Double-trigger acceleration: Unvested options vest only if the merger happens and you are terminated without cause within a certain period. 

Some plans don’t include vesting acceleration language, and the relevant terms can be specific to each employee. For example, key employees may sometimes negotiate vesting acceleration language in their employment contracts. 

A great financial advisor will do more than skim your stock option agreement — they will dig deep to understand your options and how the event could impact your specific financial outcome and help you plan accordingly.   

2. Understand if options will be cashed out or converted

During an M&A event, the acquiring company may cash out your stock options, convert them into the acquiring company’s stock, or cancel them entirely. 

If your options are cashed out, you could receive a lump sum of cash, which is undoubtedly the most straightforward route — but it’s essential to ensure that this cash-out reflects the total value of your options. 

Conversely, if your options are converted to the new company’s stock, you must assess the acquiring company’s financial health and potential. Generally, the employee’s equity value in the acquired company at the time of the acquisition will translate to some economic interest in the acquirer. A ratio between Company A and Company B is often applied to all relevant figures (exercise price, quantity, and share price).  

Acquisitions will often be a combination of cash and equity conversion, which makes it easier for the acquirer from a cash flow perspective (by using their stock, and not cash, to purchase) and also aligns employee incentives with the acquirer.  

3. Decide if and when to exercise your options

Once the conversion is complete, the employee must decide whether to purchase shares in the new company (exercise the options). This is where it’s essential to evaluate the new company’s upside potential, tax implications, and how an exercise decision might impact competing priorities in one’s financial plan. A key element in this analysis is the acquiring company’s path to liquidity or exit in the future. 

A great financial advisor will help you evaluate the pros and cons of both scenarios. For example, you’ve already invested your sweat equity and possibly some cash into this company. Do you need to invest more, and what are the possible benefits if you do so? A detailed analysis of the merger terms and potential scenarios is critical to making an informed decision. In these scenarios, there is no such thing as a blanket recommendation, and care needs to be taken to ensure decisions are made from a holistic perspective and align with your goals.

4. Manage the tax implications

M&A events can result in significant taxes for some employees, especially if a cash component is involved. This may lead to a high-income year, opening up planning opportunities. One common approach is to take advantage of higher-than-usual regular income (and tax), which may allow you to exercise Incentive Stock Options without paying the dreaded Alternative Minimum Tax (AMT). Taking that step can help position you for a better tax outcome during a future liquidity event without adding too much concentration risk. 

In those high-income years, if you’re working with an advisor who is your financial partner, you will expect them to consider and help optimize other tax decisions accordingly. Specifically, you may want to defer other forms of income or explore strategies to minimize taxable income.

5. Monitor the acquiring company’s stock

If the acquiring company is publicly traded, mergers can increase stock price volatility. The stock price could rise as markets respond positively to the deal or dip if the integration proves challenging, both of which can cause an emotional response. Be mindful of employee trading windows and explore whether utilizing a 10b5-1 plan makes sense to trade the stock systematically.  

A great financial advisor will actively monitor the stock and provide ongoing advice on whether to hold or sell it based on market conditions and your overall portfolio. They will also advise you on integrating this new stock into your broader financial plan and consider whether you’re overexposed to any area. 

6. Review retention packages and new employment terms

Executives often receive new retention packages as part of a merger to ensure they stay on board through the transition. These packages might include additional stock options or bonuses, and the terms vary widely. It’s important to review any new employment agreement thoroughly, including any new vesting schedules or clawback provisions that could impact your package.  

A clear understanding of these terms is crucial, and an advisor can provide guidance on what is possible in the future. 

7. Watch out for clawback provisions

Many M&A deals include clawback provisions, which allow the acquiring company to take back some or all of an options grant if certain conditions are met, such as leaving the company within a specific time frame after the merger. It is crucial to know if such a provision exists and how it could affect your payout if you plan to leave the company after the merger. 

8. Plan for liquidity and access to funds

Finally, ensuring you have access to liquid assets during and after the merger is essential. If your stock options are converted into illiquid shares or are subject to a lock-up period (during which you can’t sell your shares), you could be in a position where your wealth is tied up in stock without the ability to access funds when needed. While there are clear financial negatives to having your assets locked up, it can also bring heightened anxiety or stress as it feels like your future is tied to a single stock price, and you can’t do anything. It’s integral to your advisor’s role to help guide you through these periods and minimize reactions to short-term news. Having a long-term focus and not “counting your chickens before they’ve hatched” is essential for financial success. 

A merger or acquisition can be a life-altering financial event. While M&A events often lead to positive outcomes, it’s essential to have a plan in place. A great financial advisor doesn’t just help you with the basics — they go deeper, offering personalized, strategic advice at every step to help you make the best decisions for your financial future. 

This content is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.