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Ask TheStreet: Acquisitions

Editor's Note: Ask TheStreet is designed to answer questions about the market, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment advice.

If a company you own stock in is bought out, then what happens to your stock? Thanks, M.R.

Gregg Greenberg: You've picked a great time to ask about the effects of mergers and acquisitions, considering all the deals flying around Wall Street lately.

Most combinations on Wall Street are acquisitions, which occur when one company takes control of another and clearly establishes itself as the new owner. Acquisitions can be carried out in a number of ways, including exchanging cash, stock, or debt -- or combinations thereof. In an acquisition, shares of the acquiring company continue to trade, while shares of the target are removed forever.

For instance, last week, Watson Pharmaceuticals (WPI) agreed to acquire fellow generic drugmaker Andrx (ADRX) for $25 a share, a total of $1.9 billion. If the deal closes, Andrx holders will receive $25 for each share they own, and that will be the end of it.

Sometimes it gets a little more complicated, and you'll end up holding a different stock after the transaction. In another deal last week, credit-card lender Capital One (COF - Get Report) agreed to buy North Fork Bancorp (NFB) for about $14.6 billion in cash and stock.

The deal values each North Fork share at about $31.18, based on Capital One's share price when it was announced. But shareholders won't receive $31.18; they will get $11.25 a share in cash and 0.2216 Capital One shares. (Capital One shares fell 6% on the day the transaction was announced, lowering the total value of the deal. The acquiring company usually declines after a deal is announced because it is the entity spending the dollars and taking the risk)

In the end, shares of North Fork will no longer exist. All the action will be in Capital One.

You'll often see headlines characterizing acquisitions as "mergers." But true mergers occur when companies of similar sizes get together, which is why such a transaction is often referred to as a "merger of equals." Mergers tend to be all-stock deals whereby the owners of the outstanding shares of either company get the same amount -- in terms of value --- of stock in the new combined company.
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