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Ask a Fool: What Should I Do if a Company Whose Stock I Own Gets Acquired?

Matthew Frankel, CFP, The Motley Fool

Q: One of the companies in my stock portfolio recently announced that it agreed to be acquired and the price shot up. Should I keep it, or sell it and pocket the gains? 

When an acquisition is announced, the stock of the company being acquired generally rises somewhere close to the proposed acquisition price. For example, if a stock is trading for $20 and an acquisition is announced at $30, it may immediately shoot up to, say, $28. 

The question of whether you should keep the stock or not generally boils down to the terms of the acquisition -- specifically, whether the company is being acquired for cash or stock. 

If the company is being acquired for cash, my general opinion is to sell (although there's nothing wrong with waiting until the deal is done). While there's usually a bit of distance between a post-announcement stock price and the cash buyout price, I generally find it better to go ahead and cash in and put my money to work elsewhere.  

As an example, I owned shares of Zoe's Kitchen, which was recently taken private in an all-cash deal. The buyout price was $12.75 per share, so when the stock jumped to about $12.60 after the announcement, it was a no-brainer to take the money and move on. 

On the other hand, if the buyout is a stock deal, or a combination of stock and cash, the question becomes whether you want to become an investor in the acquirer.

As another personal example, I owned shares of healthcare insurer Aetna until its buyout by CVS Health was approved. I didn't want exposure to all of the aspects of CVS' business, but simply wanted to invest in the insurance business. So I sold my shares and bought another insurer. 

The bottom line is in an acquisition where you will receive stock, you need to evaluate whether the new stock will fit into your investment strategy. 

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool recommends CVS. The Motley Fool has a disclosure policy.