When you do get shares in another company automatically?

by Manshu on April 27, 2012

in Investments

Thiyagu posted an interesting comment the other day where he said that he held some shares of L&T Holdings, and when L&T divested its stake in L&T Finance he expected to automatically get shares in L&T Finance but was disappointed when he didn’t get any.

So, the question is under what conditions should you expect to get the shares of another company automatically?

I think this is most easily understood when you think of yourself as the owner of the company because as a shareholder that’s what you really are.

If you owned L&T which in turn owned L&T Finance – the value of L&T Finance is implicitly accounted for in the value of your L&T holding.  And if you decide to sell L&T Finance to someone you would expect cash for it and not shares of L&T Finance.

In terms of a company doing this — L&T divested a part of its stake in L&T Finance and got cash for those shares which went in their balance sheet. No one got new shares in L&T Finance by virtue of owning L&T itself.

It is most common for shareholders of one company to get shares of another company during takeovers and mergers. It is common for the company that’s buying to pay through cash and shares, and that’s when as a seller you get new shares.

When Facebook bought Instagram, the shareholders of Instagram were paid in cash and stock so if you owned shares in Instagram you would automatically get shares of Facebook because of this deal.

Similarly during merger of two companies, the shareholders of the companies get shares in the new company at a predetermined ratio which is usually based on how big the original entity was compared with the new entity.

As I said earlier, this is most easily understood when you think of yourself as the owner or seller of the company and think in terms of what you would have wanted in this transaction had you owned the whole company instead of a few shares.

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