Stock question

[putt4dough]

I was wondering if anyone could enlighten me about something.

If a company buys another company via stock. How does that work.

For example:
Company B buys Company A at 1.5 stocks for a value of $30 since Company B's stock is only worth $20. If you have a 1000 shares of Company A, it will equate to 1500 shares of Company B ($30K). What happened if Company B's stock price goes down to $10 before the deal is completed? Will you still only get 1500 shares at a value of $15K or would they change the ratio to 3.0 to equate the $30K?

[putt4dough]

Come on Cat, sorta need to know about this.

[domafia]

putt4dough, I believe it depends on the detailed explanation of the deal. Take for example this real world example from 2 months ago involving Bank of America (BAC)buying out MBNA that closed on 1/3/06:

Under terms of the agreement announced June 30, shareholders of Wilmington, Del.-based MBNA will receive 0.5009 common shares of Bank of America plus $4.125 in cash for each of their shares.

Though the agreement was made on June 30th the amount of shares of BAC I received was dependent on BAC's price at the time it was executed on 1/3/06.

[putt4dough]

Did the share value of BoA go down or up from 6/05? If it went up, then you made out well, if it went down, you loss value from 6/05.

Here is my real world

I have over 1400 shares of BellSouth. AT&T has made a deal to buy BellSouth. The closing price on 3/3 for BellSouth was 31.46. AT&T's proposal would be that BellSouth shareholders would received 1.325 share of AT&T stock for every one share of BellSouth. AT&T closed at 27.99 on 3/3. This means that you will get 37.09 for every share. BellSouth went up 3.04 today to 34.50 and AT&T went down to 27.02.

Right now, 1.325 share of AT&T only equals $35.80.

Under terms of the deal, AT&T would exchange 1.325 shares for each share of BellSouth, a 17.9% premium over BellSouth's closing price on Friday of $31.46. That would give each BellSouth share a value of $37.09.

I guess I am asking is will I lose money if AT&T is under 27.99 whenever the deal is finalized?

[domafia]

The short answer is yes putt.

In my case Bank of America's share price was only slightly below where it was when the deal was announced. That's why some people probably sold BellSouth today at $34.50 even though the shares could soon be worth over $37 each. There's no guarantee that AT&T will hold its value when the deal goes down.

[putt4dough]

Thanks....that is what I am affarid of. I have thought about selling and waiting about six months and buy BellSouth back if it is at a lower price and close to AT&T's price.