Marvelous Merger Still Complicated

If you want to drop the stock, do it before the actual merger date, which is slated for this fall. But if you decide to keep the shares and go for the ride, you don't have to do a thing.

The Nitty Gritty

The P&G/Gillette deal is actually pretty straightforward because Gillette shares will be exchanged for P&G shares. Things can get sticky when shares are exchanged for cash or a combination of stock and cash.

Gillette shareholders will receive 0.975 share of P&G common stock for each share of Gillette common stock they own, according to a P&G press release. That means if you have 100 shares of Gillette, you will have 97.5 shares of P&G once the deal is complete. Not too confusing.

Even better, your cost basis and holding period from your Gillette shares will be carried forward to your new P&G shares, says Stevie D. Conlon, senior tax analyst for CCH Capital Changes, a company that provides coverage of corporate actions affecting publicly traded companies. So as long as you hold on to the new shares, you don't have to do a thing.

If you decide to sell those new shares, you'll have to pull out your calculator to determine your gain.

Your cost basis in the new shares will take a little number crunching, but these days your brokerage firm and its technology should do that for you. But just in case, here's a quick example. Let's presume you invested $1,000 in 20 shares of Gillette stock and have not reinvested the dividend or added any more money since your initial purchase. In this instance, you purchased each share for $50. If postmerger, you end up with 19.5 shares of P&G (20 shares times 0.975), your new cost basis in each share would be around $51.30 ($1,000 divided by your 19.5 shares.) So be aware of your new basis before you sell.

On the tax front, since your holding period is carried forward, as long as you've held your Gillette shares for more than a year, any gains you generate from that sale will qualify for the beneficial long-term capital gains rate of 15%.

A big note: While most of us don't actually have stock certificates to correspond with the shares we hold, there are folks out there who may actually have Gillette certificates stashed away somewhere, notes Gregory Gooding, partner with Debevoise & Plimpton LLP and a member of the firm's mergers and acquisitions group. If so, you'll have to send them in to the new company and P&G will send you new certificates.

Quick Note on Dilution

Whenever new shares are added to the market, existing shareholders will feel some dilution in their ownership of the company. Basically, they'll have to share their ownership with more people. So when P&G gives shares to the Gillette folks, the ownership of the company will inevitably be divided amongst more people.

To prevent that from happening too much, P&G is planning a stock buyback to remove some of the shares from the marketplace. According to a recent regulatory filing, P&G will borrow around $24 billion so that it can buy back its shares this fall. So be on the lookout for that news in the next few months.

So as far as mergers go, this one is pretty straightforward, all around. And who knows, maybe Gillette shareholders will start to get Pampers and Tide coupons once everything is complete. If you have kids, that alone makes the deal sweet.