The Big Merger Fell Through – Now What?

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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. To anyone who holds a significant amount of stock or 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.

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.

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, tomorrow is just another day, and typically their stake in their employer is worth no less than it was before the deal looked promising. That’s one good thing we can say about being compensated with hypothetical capital – something that doesn’t exist can’t get taken away.

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 fifteen-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 fifteen years left until retirement may be facing a reality that involves ten 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, however, 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. 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 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 and Office Depot called off their proposed merger just this past week after a federal judge blocked the deal due to objections by the FTC. This wasn’t even the first time that these two corporations tried and failed to join forces, and their attempt some 19 years ago 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 drastic reductions in the share prices of both firms. Although not all cancelled 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 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.

Whether your company is a tiny startup in someone’s parents’ basement or a major international pharmaceutical company, 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.

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 are now only half as close to your goal as you were before that asset lost value.

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

Simply put, a diversified investment strategy can help you maintain a more stable financial path toward retirement. If you don’t, you may run the risk of a potential corporate merger falling through and taking everything you have worked so hard to earn down with it.

If you have a concentrated position in your employer’s stock, 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. If you’d like some help putting it all together, or even just want a second opinion on what you’re working with now, contact BFA Wealth Management today. We offer complementary investment analysis for individuals and families with $250,000 or more of investable assets, and we work with professionals in the science and technology sectors worldwide. Let’s talk.

All the best,

Mateo

Mateo James Dellovo is a private wealth advisor, financial planner, and C.E.O. of BFA Wealth Management