1.1.12.7 Mergers and Spin-offs

Mergers combine two (or more) companies to form a larger company. Frequently, the acquiring company pays shareholders of the acquired company in shares. For example, company A may purchase all of company B’s shares based on a predetermined ratio of shares, say, two shares of company A stock for every share of Company B stock outstanding. If an investor own 100 shares of Company B stock, after the acquisition is complete (and company B no longer exists as a separate entity) the investor will own 200 shares of Company A stock.

Spin-offs are like mergers in reverse. Company C decides to split off part of its operations into a separate organization. Let us say the new organization is called Company D. How are shareholders in Company C compensated for this splitting off of part of their ownership interest into a new enterprise? Usually, through the issuance of stock at some preset ratio. Let us say an investor owns 100 shares of Company C. After the spin-off of Company D, the investor still owns 100 shares of C, but you also own, say, 50 shares of Company D.