Help! My company is being acquired! What do I do?

Mergers and acquisitions are a way of life in business. From the small and obscure to the large and venerable, takeovers happen all the time. Yesterday, for example, Medicore (NASDAQ:MDKI) announced that it was being acquired by its subsidiary Dialysis Corp. of America (NASDAQ:DCAI) in a $152 million deal. Previously, SBC Communications (NYSE:SBC) announced that it would be acquiring telephone institution AT&T (NYSE:T). And Verizon (NYSE:VZ) and Qwest Communications (NYSE:Q) are locked in a duel to see who is the eventual winning suitor of MCI (NASDAQ:MCIP), a selection of Motley Fool Inside Value.

The M&A business can be trying and confusing for investors holding on to any company that finds itself embroiled in an acquisition deal. If you're on the buying end, you may see your stock take a hit if Wall Street looks askance at what the acquisition means to your company or how much is being paid. Dialysis Corp. fell more than 18% on the news of its action. If you happen to own the company being acquired, a merger announcement often results in an immediate price pop.

MCI, which has seen its rivals raise their competitive bids in an effort to win over shareholders, has enjoyed a steadily rising share price. It's up by about 33% since the original proposal was aired. In general, owning a company that's being bought out is good for your portfolio, since you realize the immediate value of the investment that's locked inside. But it doesn't always work that way. When the offer price is so close to what the stock is currently trading at, your shares just move sideways. AT&T, for example, has essentially traded around the $0.75 range since its merger was announced.

The question that always comes up is, "What should I do with my stock?" Do you hold on and accept the buyout offer, which might be in the form of cash or shares of the acquiring company? Or do you sell and just enjoy the profit?

Well, the answer isn't as ambiguous as "it depends," but it's not very clear-cut, either. For me, the answer hinges on whether I want to own the acquiring company. If I own AT&T, do I want to own SBC afterwards? If I get invited to MCI's annual shareholder meetings, do I want to attend the confabs of either Qwest or Verizon? A situation like Medicore's might be a little trickier, since it's being acquired by a subsidiary. It owns 57% of Dialysis Corp., and the merger will put a majority stake of the subsidiary into the public arena.

So if you decide to become a part-owner of the new company, you don't have to do anything. Just hold on to your shares. When the merger is complete, your brokerage house will give you shiny new shares at the right time.

It's when you decide the new management team is not for you that more questions arise. When do you sell? Should you wait for the merger to take place, or should you sell beforehand? Again, for me, I usually sell as soon as I decide I don't want the new company. If things go wrong and a merger falls through, the stock deflates again. By selling as soon as I make my ownership decision, I've locked in any profits realized. Should the deal go sour, I can always buy back in when the price falls. I've also found that there's little chance of further price appreciation. The stock of a company being acquired tends to rise to the acquisition price, and then no further. It remains static until the deal goes through. Maybe I can make a few pennies more, but the risk for me is too high.

Yet waiting can sometimes be profitable. Consider the case of another Inside Value selection: Masonite, a Canadian door maker, was to be bought out by investment firm Kohlberg Kravis Roberts. The original price offered for Masonite was around $32 a share, a 12% premium to the price it had been trading at and a 28% profit from the price at which Philip Durell originally recommended it. Not bad for three months' time. Remarkably, two of his picks have already been the subject of merger news.

Philip's a pretty shrewd guy, though, and he thought Masonite was being bought on the cheap, coming in at the low end of his intrinsic value calculation. He figured the upper end to be around $37 and counseled waiting for a better price before selling. Apparently, a lot of other investors agreed. The price spiked following the original offer, but it then started falling as it became clear that the merger was in danger of losing shareholder approval. To salvage the deal, KKR raised its bid to around $34 a share, right in the middle of Philip's valuation.

Even though Philip hasn't issued a "sell" recommendation yet, investors might want to consider whether any better offers will come along. I sold my shares for just under $34, content with my 34% gain. Sure, I could have realized a little more profit had I waited -- the stock trades just south of $35 a share now -- but I don't expect much more price appreciation going forward. And since Kohlberg Kravis is a privately held company, there's no decision to be made on owning it.

The point, of course, is that when your company is the subject of a merger, celebrate the opportunity. Consider whether you want to own the buying company, and weigh the prospects for a competing bid or the danger of the deal's falling through. When you make the decision to sell, I advocate doing so right away. Niggling over pennies just might end up being pound-foolish.

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SBC is a selection of Motley Fool Stock Advisor. Contributor Rich Duprey has locked up plenty of criminals who've discounted the value of abiding by the law. He does not own any of the stocks mentioned in this article.