What is the difference between a merger, an acquisition, a divestiture, and a spinoff?
It's important to know the difference, as this can trigger changes in your outstanding stock grants.
- An acquisition of a company occurs when all or part of a company is purchased by another company. Sometimes an acquisition takes the form of a sale of a company's assets. At other times, the shareholders of a target company sell their shares to a buyer. The assets or shares of a target company may be purchased directly by another company. In other instances, the buyer creates a subsidiary for the purpose of acquiring the shares or assets of the target.
- A merger is a form of an acquisition that is structured by combining the target company with the acquirer (or its acquisition subsidiary) into one legal entity. Sometimes the target merges with the acquirer or its subsidiary, and the target is the surviving legal entity. In other cases, the acquirer or its acquisition subsidiary is the surviving legal entity in a merger. Whether or not the deal is structured as a tax-free reorganization will affect the tax treatment of any new shares of the acquirer's stock that you receive in exchange for your old shares.
- A divestiture can be any among a broad range of transactions that result in a portion of a company, such as a subsidiary, a division, or a line of business, being sold to another party.
- A spinoff is a type of divestiture in which the divested unit becomes an independent company (perhaps through an IPO) instead of being sold to a third party.
The form and structuring of these corporate transactions are the purview of attorneys and accountants and are done in a particular manner for variety of complex legal, tax, and economic reasons. At the least, the acquisition or merger transaction is most likely to be considered a "change of control" under your stock plan (check it for the technical definition and timing under your plan). Triggering this provision will probably have some impact on your grants, such as accelerating the vesting.
Divestitures and spinoffs also affect outstanding equity grants in various ways, depending on how they are structured. In these deals, options and restricted stock held by employees in both the prior parent company and the new company are affected and adjusted. For more on spinoffs, see articles from Practical Law Company and Wachtell Lipton Rosen & Katz. See also an article in The Wire for details on the way in which Time Warner structured its equity plans when it arranged the spinoff of its magazine properties (Time Inc.) into a separate public company.
An acquisition does not occur when a third party (such as a venture-capital firm) makes an investment in a company. Although new shares of a company's stock are issued in connection with such a transaction, the investor is better viewed as providing additional financing to the business so that it can continue to grow.