Merger Basics

• A merger is an agreement between two companies to form a single, larger company. When two companies merge, all assets and liabilities for both companies are combined. In most cases, a larger company takes over a smaller company, and the smaller company takes on the name of the larger company. As a result, employees of the smaller company become employees of the larger company.
  
  

Making an Offer

• When a company decides to merge with a second company, the process begins with a tender offer. A tender offer is a proposal that tells the second company how much it is willing to pay in terms of cash or stock shares. Usually, the tender offer has a deadline, giving the target company's shareholders a specific time to accept or reject the offer.
  
  

Responding to an Offer

• Once a tender offer is made, the target company can put the offer to a shareholder vote and accept the offer if a majority of shareholders agree to the terms of the offer. The target company also can attempt to negotiate for better terms. If both companies can reach an agreement, both companies can move on to close the deal.
  
  

Closing the Deal

• Once a deal is struck, the company that made the tender offer pays cash or company shares to the shareholders of the target company. If both companies reach a cash deal, the target company stockholders receive a cash payment in exchange for their shares. If it is a share deal, stockholders from the target company have their stock shares replaced with stock shares in the newly formed company. Stock deals usually are more beneficial to stockholders because receiving stock is not a taxable event. If you receive cash for your shares, you have to pay capital gains tax on any investment gains earned from the sale of your shares.