Booyah Breakdown: Wall Street Weddings

If you decide this union is headed for divorce court, then drop the stock before the actual merger date. But if you want to go along for the ride, make sure you understand the transaction.

The Straightforward Deals

In any deal you need to know what you're getting and whether the deal is taxable to you.

If your company is being acquired, you will most likely lose your shares and receive either cash for your shares, new shares of the big company coming in or a combination of both.

With a cash purchase, the buyer just gives cash, and you're done with the investment. So take your money and run. With a stock deal, you'll render your old shares and get new shares in the bigger company. This is where things get hairy, because you'll probably have to recalculate the basis for your new shares. That's accounting-speak for spreading the original cost of your shares of the little company over the new shares you got from the deal.

Let's presume you spent $100 for your four shares of the stock that was just acquired. You paid $25 per share. So $25 is your basis in each share. As part of the deal, you got two shares of the purchasing company for every single little share you had. So instead of four little company shares, you now have eight big-company shares. Since you originally spent $100 to get those four shares, you have to spread that original $100 over your new shares. So your new basis in each of those new shares is $12.50 ($100 divided by eight).