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NFT: Stock Merger Question

Samiam : 8/22/2016 5:23 pm
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.
Proration here  
Deej : 8/22/2016 5:35 pm : link
means that the acquiring company has put up a pool of cash. If too many stockholders want the cash, then each will get only some cash, some stock. Proration is just a way for Tyco to make sure it doesnt pay more than the credit facility they arranged for the cash offer.

Looks like taking the stock is the way to go.
Is that right Deej  
pjcas18 : 8/22/2016 5:40 pm : link
you're the expert here, but having been through a ton of these acquisitions I thought "subject to proration" meant that 1:1 doesn't always mean 1:1 necessarily.

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.

Deej has it right,  
ColHowPepper : 8/22/2016 8:56 pm : link
if a bit shorthand. When there is a merger and the acquiring entity is offering consideration part cash, part stock, let's say 55/45, respectively, subject to proration, if all stockholders of the entity being acquired voted to accept the terms of the merger AND consideration in that proportion, Sam would receive 55% of the merger consideration in cash and 45% of it in the stock of the acquiring 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.
Yeah I was too shorthanded  
Deej : 8/23/2016 11:15 am : link
Here is how it will work. Lets say Tyco agreed to merger consideration of 60 Tyco shares and $40 cash for 100 Johnson shares. If 60 J shareholders want stock and 40 want cash, they'll all get exactly what they want. If 80 want stock and 20 want cash, what will happen is: (1) each Johnson stockholder who wants cash will get their $1/share, and (2) each Johnson stockholder who wants Tyco stock will get a prorated allotment of Tyco stock because there isnt enough to go around, ie. each will get .75 shares and $0.25 cash.

The merger FAQ 2nd question and linked Explanation of JCI share transfer scenarios lay it out.
Link - ( New Window )
I couldn't figure out the price disparity  
njm : 8/23/2016 11:35 am : link
And didn't see any explanation elsewhere. I sold.
Deej  
Samiam : 8/23/2016 11:37 am : link
Thank you for the explanation; stock is the way to go. I'm wondering why anybody would take the cash which is valued $10 a share less than the current share price
No problem  
Deej : 8/23/2016 11:46 am : link
What is weird to me is that the current stock prices predict that people who want stock will get a full share. TYC is at 45.25 and JCI is at 45.22.

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.
RE: I couldn't figure out the price disparity  
Deej : 8/23/2016 11:49 am : link
In comment 13082918 njm said:
Quote:
And didn't see any explanation elsewhere. I sold.


TYC was trading at around $34-35 a share before the merger announcement, which is approx the same as the cash offer.
People will get a full share no matter where its trading  
ron mexico : 8/23/2016 12:12 pm : link
But the arb traders will make sure that the values are equal on both sides of the deal. If there is any in-equality, they will trade it till its gone

Also  
ron mexico : 8/23/2016 12:16 pm : link
the main reason for the small difference in price is that TYC will do a small reverse stock split right before the merger.

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.
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