I own shares of a stock, Johnson Controls that is merging with Tyco. Shareholders have the option of exchanging shares of the old company for the new company 1:1 subject to proration and I don't know what proratio means here. Or, you can exchange the shares for $34.88 but the stock closed today at $44.52 so why would anybody who wants the cash do an exchange at $34.88 when they could just sell their shares for $10 more per share?
I asked the financial guy and he couldn't answer. Can someone explain why the offer would be that much lower other than when the merger was announced the stock was lower? If I do nothing by next week, the deadline, the shares will be exchanged.
Looks like taking the stock is the way to go.
for example if my current company stock was $50 and the acquiring company stock was $100, it was really 1 share of my current company stock equals .5 shares of the new company.
That's not the real world: depending how the universe of acquired stockholders view the business prospects of the acquiring entity, they may prefer to elect 0% cash and 100% stock, if they like those prospects; the other side of the coin is that those stockholders who want to reduce exposure to the equity markets right now (probably a majority given the averages), or don't like the business prospects of the acquiring entity, or who would like to deploy cash to a different name, they might elect 100% cash and 0% stock, and there are those in between.
In order to allocate the aggregate cash set aside to pay stockholders of the acquired entity (probably including lots of traders, PE, HFs, etc.), as Deej says, there is a finite pool of cash to pay their claims. When all the desired allocations elected by stockholders are submitted at the time of the vote, if any, to approve the merger, that sorts itself out to a definitive, aggregate allocation, let's say, 65% cash and 35% stock. But if that 65% election of cash multiplied by xxx,xxx,xxx shares of stock exceeds the pool of available cash to pay that amount, then those cash claimants will be cut back, i.e., prorated, to a percentage, say, 58%, cash in order to pay stockholders of the acquired entity.
So, if you put in for 100% cash, the amount of cash you would receive would be apportioned--reduced-- across the base and you will receive the stock equivalent of the balance, or difference. If you wanted all stock--and if as in the example above claims for cash exceeded the amount available--you would still receive all stock. Or the demand could work in reverse.
The merger FAQ 2nd question and linked Explanation of JCI share transfer scenarios lay it out.
Link - ( New Window )
I'd think that if the stock was clearly a better deal, which it seems like, that you'd see JCI trading at a discount on the anticipation that people who want stock will not get full shares. Maybe there is some tax or other consideration Im missing (I just looked at the first few questions on the merger FAQ). Maybe there is an article out there on this election.
TYC was trading at around $34-35 a share before the merger announcement, which is approx the same as the cash offer.
Immediately prior to the merger, Tyco will effect a reverse stock split so that Tyco shareholders will receive a fixed exchange ratio of 0.9550 shares for each of their existing Tyco shares.