What Happens to Stocks When Companies Merge?

Many companies include stock options as a critical part of their 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 accelerate the vesting of unvested options in the event of a merger or acquisition. 

There are typically two types: 

• Single-trigger acceleration: The company vests unvested options immediately when the M&A deal closes.
• Double-trigger acceleration: Unvested options vest only if the merger occurs and the company terminates your employment without cause within a specific period. 

Some companies design plans without vesting acceleration language, and the relevant terms can vary for each employee. 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 can receive a lump sum of cash, which is undoubtedly the most straightforward route. However, it’s essential to ensure that this cash-out amount 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. The acquirer often applies a ratio between Company A and Company B to all relevant figures, including the 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 instead of cash to purchase) and also aligns employee incentives with those of the acquirer.  

3. Decide if and when to exercise your options

Once the acquiring company completes the conversion, you must decide whether to purchase shares in the new company by exercising your options. At this stage, it’s essential to evaluate the new company’s growth potential, the tax implications, and how exercising your options could affect other priorities in your financial plan. A key part of this analysis involves understanding the acquiring company’s path to liquidity or a future exit.

A great financial advisor will walk you through the pros and cons of each scenario. You’ve already contributed your time and possibly your money to help build this company, so should you invest more, and what might you gain by doing so? To make a wise, informed decision, you need a detailed analysis of the merger terms and all potential outcomes. There’s no one-size-fits-all answer, so your advisor should take a holistic view to ensure the decision aligns with your broader goals.

4. Manage the tax implications

M&A events can trigger significant taxes for some employees, especially when they involve a cash component. This often results in a high-income year and creates new planning opportunities. Many employees use this higher-than-usual income to exercise Incentive Stock Options without triggering the Alternative Minimum Tax (AMT). By taking this step, you can set yourself up for a better tax outcome during a future liquidity event, while avoiding excessive concentration risk.

During high-income years, your financial advisor should proactively evaluate and optimize your tax decisions. You may choose to defer other sources of income or implement strategies that reduce your overall 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 essential to review any new employment agreement thoroughly, including any new vesting schedules or clawback provisions that may affect your package.  

It’s crucial to understand these terms. An advisor can provide guidance on what is possible in the future. 

7. Watch out for clawback provisions

In many M&A deals, the acquiring company includes clawback provisions that let it take back some or all of your option grant if you leave the company within a specific time frame after the merger. You must identify whether such a provision exists and understand how it could affect your payout if you plan to leave the company once the merger is complete.

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 hatch 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.