Let me try to answer the more specific questions first, then I’ll get to the broad one. First, in a cash deal where A is being acquired by B, the shareholders of A are selling their shares to B for cash. Typically B would have to pay a premium over the market price to effectuate the deal. In that type of deal, B is basically just becoming the controlling shareholder of A by buying up shares from the shareholders.
As far as the straight conversion of shares, this would likely happen in a merger situation where A and B combine to form C rather than an acquisition like above where A acquires and takes over B. In this case the shares of A and B will simply be converted into shares of C.
So, what should everyone know about mergers and acquisitions? I’ll try to highlight a few things here:
- They are different -- As I hinted at above, a merger and an acquisition are two different processes. The results could end up being similar in the end but it is important to remember that the routes taken to get there are distinct.
- Sometimes they fail -- Not every merger or acquisition is successful. Especially as an investor, you should evaluate objectively and not get caught up in the hype.
- Hostile vs. Friendly -- An acquisition could be labeled “hostile” or “friendly.” This just refers to whether the shareholders of the company being acquired are on board with the transaction or not. Obviously if they welcome the transaction it is friendly and if they oppose the transaction, it is considered hostile. It is important to remember though that just because an acquisition is labeled hostile, it doesn’t necessarily mean that it will be bad for the future of the company being acquired.
As an investor, you would want to evaluate the proposed transaction to see what the consequences for both companies will be before making a decision. The above are just a few things to think about when doing that evaluation.
As a business owner, a pending merger or acquisition will have even more direct consequences. In that situation, it would be best to speak with an attorney before trying to work on any deal.