Really appreciate all of your ideas and advice - very helpful! I would like to clarify one point - this is not a stock option scenario. I have owned my shares in the acquired company outright for almost four years, and I will be paying long term capital gains in 2010 on both the cash and stock components of the acquiring company's payment for those shares. My basis in the acquiring company's stock will be its price on the closing date (probably 11/30/10), so a quick sale would not result in much of a gain or loss.
Also, I'm not receiving dividends today as I won't take possession of the acquiring company's stock until closing. The first dividend should be granted on 12/27/10.
My biggest concerns with a quick sale are knowing what to buy, making the purchases quickly enough to get the portfolio performing, getting a high price for the sold stock, and paying a low price for the purchased assets. If not for the single stock concentration risk, I would
1. Use some of the cash to build a CD ladder to cover three years of expenses.
2. Allocate more of the cash to a money market account covering two years of expenses.
3. Over the first 12 months, dollar-cost-average the remainder of the cash into longer term investments that improve the overall asset allocation.
4. After 12 months, begin selling the stock in tranches when its price is high in order to fund ongoing dollar-cost-averaging into the desired asset allocation.
I like this idea because it mitigates all of the "sell it all on Day 1" risks and lets me come up to speed more slowly and systematically.
Of course, the risk is real, which is why I'm so interested in all of your thoughts!
A few years before retiring from Intel I had 76% of my assets tied into the companies stock. Normally, for someone with a concentrated position. I'd discuss the use of covered calls and collars to slowly divest over time and minimize the tax consequences. Frankly you situation is much easier and Nords is right. You should sell a large portion of your position and do most of it before the end of the year. Set a goal to get your position down to 20% (max) <10% (preferred) within a year.
Lets exam the good reasons for maintaining a concentrated position.
1. You are officer of the company and you have corporate/sec regulations that make it difficult to sell.
2. Your position and/or tenure give you special insight into the companies future prospects that is better than an analyst.
3. There are tax advantages for postponing selling
A common but not good reason is
4. An emotional attachment to the company.
Now for me and many other people 2-4 are pretty common. In your case you haven't worked a day for the acquiring corporation so
neither 2 or 4 apply. In fact I'd argue that #3 taxes makes a strong case to sell now.
If Congress does nothing (and it seems pretty likely to me) the Bush cuts expire and capital gains jump from 15-20%, dividend income is treated as ordinary income. Even if Congress actually does something I find it hard to imagine that maintaining "tax cuts for the rich" is something that is going to pass. Even if they maintain the 15% capital gains rate and special rules for dividends, I suspect that somebody selling several hundred thousand (or more) worth of stock is going to be considered rich. So why not act this year and take advantage of the lowest capital gains we are likely to have for sometime.?
It seems to me that only two reason you have for not selling is fear that I sold at the right time and I don't know what to put the money in.
For the first one you certainly can apply dollar cost averaging to get you out of the position, but do it quickly 6-12 months. As for the second one, right now I hate all investment options, but I hate dividend paying stocks slightly less than the other choices, and the 5% Penfed CD doesn't suck too much. However all of other investment dilemmas you face, really pale compared to having more than 1/2 of your assets in a single company.
Finally a word about dividend stocks, when I first came on to this forum I thought dividend stocks were Nirvana, sure you need some cash and some bonds but dividend stocks were great because the gradually increased dividends. Even if the price dropped 50% you didn't care much because your income remained constant. This seemed true up until fall of 2008, when every bank stock I own slashed its dividend and even quasi-banks like GE followed suite, and finally Pfizer cuts its in 1/2. Suddenly my dividends don't look as good as bonds (except for GM bonds
) and no where near as good as a CD.
Imagine if you were one of the founders of an small oil firm acquired by BP over the last year or so, AFAIK they would often give you a choice of BP stock instead of cash. You are comfortable collecting the prodigious dividend checks and enjoying your retirement until the spill happens. Now stock drops by almost 1/2 and the dividend checks? The stop for who knows how long. I bet plenty of those folks wish they had diversified.
To summarize in the words of Cramer sell sell sell.
BTW, I had very enjoyable few years as kid in Evansville.
