The Big Merger Fell Through – Now What?

These days it seems like mergers and acquisitions are being considered more than ever and it isn’t just established players hoping to snap up promising startups to boost their vertical integration. Major corporations, some of the largest in their industries, are either joining forces or buying out their most significant competitors at a noteworthy pace.

Employee Stock and Options

To anyone who holds a significant amount of stock or stock options at their employer, these big deals can make a tremendous difference in the value of their investment accounts, not to mention their outlook for the future. Just as easily, if a merger or acquisition falls through due to an unforeseen complication, things can take a sour turn seemingly overnight. (For more, see: Startup Crowdfunding Rules: What You Should Know.)

The bigger the deal, the more likely it is that one or more government agencies, and even agencies in more than one government, will get involved, slowing down the process and sometimes introducing stipulations that alter the outcome of the merger or acquisition. Many times, these regulatory interventions put the brakes on a proposed deal for good.

During the lead up to a merger or acquisition, questions about the future of all involved entities and about the role governments will play in determining their outcomes tend to create quite a bit of flux in the value of corporations on either end of the proposal. Values can spike when the future of the merged entity looks rosy, and they can plummet when issues arise.

Due diligence on the part of the potential acquirer during these types of deals can also bring serious issues to light, causing both firms to walk away from the negotiating table and pushing the value of the acquisition target far below what it was prior to talks with the potential acquirer.

Startups

For employees at startup companies, where large amounts of ownership shares in the firm are commonly included in compensation packages, often in lieu of a traditional retirement plan like a 401(k), the stakes are certainly high. But employees at these firms are often on the younger end of the spectrum and the hypothetical shares they hold only have value upon acquisition or a public offering, unlike existing publicly-traded stock.

These “all or nothing” scenarios can make lucky entrepreneurs rich overnight. But for startup employees who watch a potential deal fall through, typically their stake in their employer is worth no less than it was before the deal looked promising. (For more, see: The Virtues of Being Financially Organized.)

Publicly-Traded Companies

At a publicly-traded company, however, things are very different for the many employees who own bona fide shares of stock at their employer or for those who have significant options. A merger or acquisition that creates a stronger, more valuable entity can multiply the value of the shares of both parties to the deal immensely. For someone with a 15-year path to retirement, that timeframe could compress down to a matter of months.

Unfortunately, because shares of a publicly-traded company have a tangible value, a deal falling through or another unexpected factor can slash the value of those shares just as quickly. That employee with 15 years left until retirement may be facing a reality that involves 10 more working years than they had anticipated – or an unexpected need to start rejuvenating their curriculum vitae. If you think that can’t happen to you, here are two examples in which tens of thousands of folks who thought the same thing found out the hard way that they were far more vulnerable than they thought.

By now, the story of Enron Corporation is ingrained in the psyche of most American professionals as a cautionary tale. Before Enron’s financial mismanagement, fraud and insider trading scandal were brought to light, some 20,000 Enron employees simply showed up to work every day, content with their positions at a top energy company – one with a generous stock price as well as a CEO who openly encouraged anyone who would listen to buy up shares. (For more, see: 3 Things All Self-Directed Investors Should Know.)

While the Enron fiasco didn’t involve a merger, it is an excellent example of how dangerous it can be to hold a concentrated position. If you had a diversified portfolio at the time and 2% of your holdings were shares of Enron, you would have walked away from that situation with 98% of your portfolio intact, assuming that every other asset you held stayed static in value.

If you were an Enron employee with a concentrated position in company stock thanks to your compensation package, you were probably closer to square one when the dust settled, and your retirement plan most likely needed to be rebuilt from scratch. That kind of sudden loss is devastating enough to a young professional, to say nothing of the impact on employees nearing retirement age.

More recently, Staples Inc. and Office Depot Inc. called off a proposed merger after a federal judge blocked the deal due to objections by the Federal Trade Commission (FTC). This wasn’t even the first time that these two corporations tried and failed to join forces. Their attempt in 1997 was thwarted by similar regulatory challenges. This time, with the market for products offered by both firms in decline, investors fled both entities in droves, resulting in reductions in the share prices of both firms. Although not all canceled mergers result in lower share prices at one of both sides of the fallen deals, it is not uncommon, and growing concern by governments worldwide about the long-term effects of large corporate mergers and acquisitions are putting a stop to such proposed plans on a more regular basis.

From the perspective of a highly-compensated employee, the consequences of a sudden loss of share value can be hugely impactful when the bulk of your retirement fund is tied up in your company’s stock. And deals come off the table at the last minute more often than many people realize and for many more reasons. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

Whether your company is a tiny startup or a major international corporation, you can rest assured that the first attention your company gets as you move closer to being an acquisition target is going to come from your strongest competition. No matter what you do, if you do it well, somewhere out in the world there is a shrewd product manager watching your every move right now, figuring out how to do it faster, cheaper or better in any other way that would make a potential acquirer take notice.

Key Takeaway

For all of these reasons and more, the key takeaway here for anyone with a large amount of stock or options at the company they work for is this: concentrated positions in employer stock make your financial stability and your retirement plan dependent on a single factor, potentially exposing you to an extremely high degree of risk.

For example, if you own many assets in several asset classes and one asset loses 50% of its value, your overall portfolio won’t be impacted all that much. If you have a concentrated position in only one asset, such as your company’s stock, that 50% loss means you may now be only half as close to your goal as you were before that asset lost value.

Depending on your circumstances, this might mean the difference between retiring next year and having to work well into your 70s.

Simply put, a diversified investment strategy can be a powerful tool to help you maintain a more stable financial path toward retirement. If you have a concentrated position in your employer’s stock or any other single asset, it may be time to start planning for a more balanced and diversified approach. Make a personalized financial plan based on your own goals and needs, and put together an investment strategy that matches the risk level of your investments to your own true tolerance for risk and your time horizon for retirement. (For more, see: 5 Financial Planning Decisions You Won't Regret.)