Do you get the dividend if the merger closes before the payment date?

Usually what counts is whether you owned the shares before the ex-dividend date and whether the dividend was declared before closing. A dividend declared with a record date ahead of closing is normally still paid to holders of record, even if the cash arrives after the deal completes. The merger agreement and the company's announcement confirm it.

Is the cash from a buyout taxed like a dividend?

In a taxable cash deal the payment for your shares is generally treated as proceeds from a sale, so the gain or loss is measured against your cost basis. Dividends paid before closing are taxed as dividends. Stock-for-stock deals are often structured so no tax is due until you sell the new shares. Situations differ, so check with a tax adviser.

What Happens to Your Dividend When a Company Is Acquired?

Q: What Happens to Your Dividend When a Company Is Acquired?

Before closing, the merger agreement usually lets the company keep paying its regular dividend and bars increases or specials. The last payment may be made in full, prorated or dropped, depending on the agreement. After a cash deal the income stops; after a stock deal you collect whatever dividend the buyer pays on your new shares.

Somewhere in the covenants of a merger agreement, in the long list of things the target promises not to do before closing, there is usually a line about dividends. A typical version lets the company keep paying its regular quarterly dividend at the current rate and forbids raising it, paying a special dividend or buying back stock without the buyer’s consent. That line sets your income until closing.

What happens to the dividend before the deal closes?

Most of the time, nothing visible. The company keeps declaring its regular dividend on the usual schedule. It just cannot raise it.

Some agreements go further. A target that is short of cash, or a buyer that wants every spare dollar kept inside the business it is about to own, can negotiate a full suspension of the dividend from signing until closing, which for a deal waiting on regulators can mean several missed quarters. Others cap the regular dividend at a stated amount per share. Read yours.

What happens to the last dividend?

Here deals differ most. Closing rarely lands on a record date. So the agreement has to say what happens to the partial quarter, and it usually picks one of these:

Paid in full, when the record date falls before closing: holders on that date get the whole dividend, even if the payment itself arrives after the deal has completed and the shares no longer trade.
Prorated, as a final “stub” dividend for the days since the last record date.
Dropped.

That last case happens when closing comes before the next record date and the agreement says nothing about a stub. The partial quarter goes unpaid.

In stock deals the two companies often coordinate their record dates. Holders then collect exactly one dividend for the quarter, from one company or the other. The proxy statement will describe it.

What happens after a cash deal?

The income stops. At closing your shares are cancelled and you receive the cash price for each one, and there is no successor stock and no successor dividend.

That leaves a hole. A position that paid $1,000 a year now pays nothing until you put the cash back to work, and the obvious move, buying whatever yields the most, carries the same risks covered in replacing lost dividend income after a cut. Size the gap with the dividend cut calculator.

What happens after a stock deal?

You become a shareholder of the buyer. Your income is whatever the buyer pays. The exchange ratio does the arithmetic.

The buyer pays more per share. Your income still falls by $40 a year.

Per-share dividends can’t be compared across a merger until you multiply by the exchange ratio: each old share here turns into 0.8 of a buyer share paying $0.60, which works out to $0.48 a quarter for every share you used to own, 4% less than the $0.50 you were getting before the deal was even announced.

It can go the other way. A buyer with a generous payout can raise your income. Either way the new dividend belongs to the buyer’s board, which can change it after closing like any other.

Fractions are usually settled in cash. A ratio that leaves you with 400.4 shares means 400 shares plus a small payment for the rest.

What if the deal falls apart?

Then the covenants go with it. Once a merger agreement is terminated, the limits on dividends end, and the board is free to set the dividend where it likes, which may be the old rate, a higher one if it had been held back, or a lower one if the company agreed to the deal because it needed a buyer. The share price usually falls back toward where it traded before the announcement, so the yield on your cost can look unchanged while the value of the position has dropped.

What about mixed deals and options?

Many deals pay part cash, part stock. Work the stock portion through the exchange ratio as above. The cash portion earns nothing until reinvested. If the agreement lets holders elect cash or stock, subject to proration when too many pick the same one, you may not know the final split between the two until after the deal has closed and the exchange agent has done its count.

Options on the target change too, usually into rights to the deal consideration, as set out in what happens to your options in a buyout. A dividend paid in extra shares, a stock dividend, raises your share count before closing. Every one of those shares then goes through the exchange ratio. The dividends hub covers the rest of the income side.