What Happens to Your Holdings in the Event of a Merger or Acquisition?

Post Date : March 29, 2025

What Happens to Your Holdings in the Event of a Merger or Acquisition?

Disclaimer: Investments in the securities market are subject to market risks. This content is for educational purposes only and does not constitute financial advice.

A merger is a common corporate action that has far-reaching implications for a company’s structure, shareholders, and the stock market. Whether you are an investor or a trader, it is essential to understand how mergers work and how they may affect your investments.

What Is a Merger?

A merger occurs when two or more companies combine to form a single entity. Companies undertake mergers to achieve economies of scale, expand their market reach, or create additional value for shareholders.

In such cases, shareholders of the merging companies receive shares in the newly formed entity, as determined by a predefined ratio outlined in the merger agreement.

Impact on Shareholding Pattern

When companies merge, the shareholding pattern changes. Shareholders in one or both merging companies receive shares in the new entity, with the number of shares allotted based on the merger ratio. This redistribution alters the ownership structure of the combined company.

For example:
If Company A merges with Company B at a ratio of 2:1, it means that for every 2 shares of Company A, shareholders will receive 1 share of the newly formed entity.

Cost of Acquisition and Merger Ratios

The cost of acquisition plays a crucial role in calculating the average price of shares post-merger. Let’s walk through an example to understand this better.

Example: Calculating the Average Price of Shares Post-Merger

Let’s consider the merger of ABC Ltd. and XYZ Ltd. to demonstrate how to calculate the new average price of shares in the merged entity.

Step 1: Original Holdings

You own:

• 100 shares of ABC Ltd. at an acquisition price of ₹1,500 per share.
• 50 shares of XYZ Ltd. at an acquisition price of ₹2,500 per share.

Total cost of your holdings:

Step 2: Merger Ratio

As per the merger agreement:
For every 25 shares of XYZ Ltd., shareholders will receive 42 shares of ABC Ltd. (1:1.68).

Since you own 50 shares of XYZ Ltd., the shares you will receive in ABC Ltd. are:

50 × (42 ÷ 25) = 84 shares of ABC Ltd.

Your total holding in ABC Ltd. after the merger:

• 100 original shares of ABC Ltd.
• 84 new shares of ABC Ltd. (from XYZ Ltd.).
• Total: 184 shares of ABC Ltd.

Step 3: Apportioning the Cost of Acquisition

The total acquisition cost of ₹2, 75,000 needs to be distributed between the original and new shares of ABC Ltd. based on the number of shares.

Step 4: Final Average Cost per Share

The average price for all 184 shares of ABC Ltd. is:

₹2, 75,000 ÷ 184 = ₹1,494.57 per share

Handling Fractional Shares

In some cases, mergers result in fractional shares. These are typically rounded down, and the value of the fractional shares is credited directly to your linked bank account by the Registrar and Transfer Agent (RTA) appointed by the company.

Conclusion

Mergers are designed to create stronger, more competitive companies. As a shareholder, understanding how your holdings and cost of acquisition are impacted is crucial for making informed investment decisions.

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