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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


agreed to acquire fellow generic drugmaker



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


agreed to buy

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North Fork Bancorp


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.

The 1998 marriage of auto giants Daimler-Benz and Chrysler is a good example of a merger. After the executives negotiated the specifics of the deal, shares of the individual companies were replaced by shares of a new company called




It's very rare to see a deal that is purely a "merger of equals," mostly because there are few "equals" on Wall Street. Usually, one company comes into a deal from a position of much larger size or financial strength. That's why most combinations are pure acquisitions, despite headlines that often say "merger."

Recently, on Jim Cramer's "Mad Money," a CEO reported a very positive outlook for his company and Cramer gave the company a "thumbs up." The next day, while researching the company, I noticed that the same CEO sold thousands of shares that he owned. If the company's prospects look so good, why is the CEO selling? Best Regards, W.S.

First of all, I do not know the CEO or the episode of Mad Money to which you are referring, so I can't comment on that particular case. That said, I applaud you for doing what a good investor -- or journalist -- should always do, and that is "follow the money."

If an insider is reported selling shares of his own company, then he or she better have a good reason. After all, in the end, who knows more about a company's plans than its officers and directors?

Luckily, insider sales reports are available to investors because of rules enacted by the

Securities and Exchange Commission

that were made even stricter after the collapse of the Internet bubble. According to Thomson Financial, insiders are now required to report trades by the second day after a transaction, rather than the 10th day of the month following the trade as was required under the old rules.

It's very important to remember, though, that, just because an executive sells stock in his company, it doesn't mean that he thinks the shares are no longer worth holding.

Just like your average investor, insiders have financial needs, too. They may be selling shares to raise money to purchase a house or pay a college tuition bill. They could be selling shares to buy a car or go on a vacation. Who knows?

Often, executives have too high a percentage of their wealth wrapped up in their employer's stock, so they feel the need to diversify their portfolio just like any financial planner would advise. This type of reasoning is especially true when it comes to entrepreneurs who put their entire net worth into starting a company, eventually taking it public and then realizing that everything they own is wrapped up in a single stock.

You would diversify under those conditions too, wouldn't you?

What's key for investors tracking insider sales is to determine if these sales are spur-of-the-moment actions or planned according to a long-term schedule. In order to avoid the appearance of impropriety -- basically accusations similar to the one you made about the CEO on Mad Money -- smart executives often have a plan to sell a set number of their shares automatically on a monthly basis.