(Part 1 of 3: Company Acquisition)
One of the most exciting parts about working at a startup, especially in the tech sector, is owning stock in that company and having it be acquired. Acquisitions add tremendous wealth and value to the shareholders of companies and provide major incentives for people to work at smaller companies. For example, if I start a job at Google today, I could make a decent income and even get stock in the company, but odds are, at this point, I probably won’t become rich working there. However, if I worked at a company like Nest, which Google acquired for $3.2 billion in 2014 (CNET.com), I would have probably had a much lower salary, but made a lot more money when Nest was acquired. Owning stock is the key to wealth and acquisitions are a medium by which that wealth is solidified. So, how are companies acquired and what is the best way to utilize the proceeds? Here are some examples of companies that have been acquired:
This is the simplest one to understand and the one with which you’re most familiar - a larger company buys a smaller one with the cash that they have. Recently, the European company Unilever purchased Dollar Shave Club for $1 billion in cash, according to the Wall Street Journal. Shareholders are obviously ecstatic about their newly found wealth. Even still, this type of acquisition can have its pros and cons.
• You receive a lump sum of money with which you could do whatever you want
• You can diversify into new investments
• Your capital gains tax bill may be very high, especially true if you live in California, where the highest earners will pay over 37% in capital gains taxes, which makes California the second highest place on the planet for capital gains (Nerdwallet.com.)
• You may also get an alternative minimum tax (AMT) added to your taxes, which is highly complex and can create even higher taxes. This may happen if you have a very large payout and may not have paid enough in income taxes.
A Stock Acquisition
The stock acquisition normally occurs when a larger company doesn't have enough cash on hand to buy the other company, or if the acquirer’s stock valuation is very high and they can use it as premium currency.
• If the acquirer is a successful company, you will reap the benefits of owning a good stock that may have more upside potential.
• Can be more tax efficient in some occasions, saving you money.
• On other occasions this can complicate your taxes.
• If the acquirer doesn't perform well or the market views the deal as a negative, the value of your shares in your new company can be significantly less by the time the acquisition is completed
Cash and Stock
Many companies will choose to do a combination of the two previously mentioned options, giving you the best (and worst) of each world. The most notable example of how the acquired shareholder benefits from this is when Facebook bought WhatsApp for $19 billion, $14 billion of which was in Facebook stock. By the time the deal closed, WhatsApp employees received $22 billion in value (Forbes.com.) That means that even after that monstrous deal to acquire them, the employees of WhatsApp received an additional 16% over what they were supposed to get. Those who sold their shares made a nice some of money. Those who held on to their Facebook shares have seen their value appreciate another 67% since then, according to Yahoo finance. Facebook is a great example of an extremely well-run company that added huge value to WhatsApp shareholders - another acquiring company may not have done so well. Therefore, you need to evaluate what the acquiring company’s potential for the future is when deciding what to do with your company stock.
• You get both stock and cash, so you get money in your hand as well as more equity in a new (and hopefully good) company.
• This creates the most complex tax and financial planning scenario
• Still may lose money if the new company doesn’t perform.
"So what do I do now that my company has been acquired?"
Now that we know how companies are acquired, what should you do with your newfound wealth? Well there are several things that you want to do: talk to a financial advisor; talk to your accountant; talk to your family. Remember, you build wealth through concentration; you help preserve wealth through diversification.
When you have a large nest egg, it’s important to preserve it. My next article in the series will discuss some strategies that strive to minimize your taxes and potentially maximize your investment returns, so . . . stay tuned . . .
By Ayal Shmilovich
Wall Street Journal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Stock investing involves risk including loss of principal. No strategy assures success or protects against loss.