What Happens to Stock When a Company Is Bought Out?
If a company is bought out, various factors determine what happens to the stock. What do investors need to know?
Dec. 4 2020, Published 1:59 p.m. ET
Mergers and acquisitions take place on Wall Street all the time. Usually, they aren't a bad deal for stockholders in the target companies. After all, the board of directors and executives aren’t going to sell their businesses unless they receive a premium for it. How does it all turn out for retail investors? If a company is bought out, various factors determine what happens to the stock.
When one public company acquires another, shareholders in the company being purchased will usually be compensated for their stocks. They can be compensated in the form of stock in the company doing the buying or in the form of cash. Either way, the shares of the company being purchased will generally cease to exist.
How does an acquisition impact shareholders?
When a company announces that it’s being bought out or acquired, it will likely be at a premium to the stock’s current trading price. An acquisition announcement usually sends a stock’s price higher to meet the price proposed in a takeover bid. However, there can be uncertainty surrounding the share price if there are doubts that the agreement can be completed due to regulatory or other issues.
In a cash buyout of a company, the shareholders get a specific amount of cash for each share of stock they own. After the acquisition deal is closed, the stock is canceled. The company no longer exists as an independently traded company. In a stock-for-stock acquisition, the shares of the takeover company will be replaced with the shares of the new company. In most cases, the acquisition deal is structured as a combination of both methods.
Should I sell stock after an acquisition?
Shortly after an acquisition deal is announced, the target company’s stock usually skyrockets to trade close to the proposed price. If the buyer agrees to pay $100 in cash per share for the acquired company’s stock, Wall Street might push its stock price to $99.50 in a matter of minutes. The time right after a deal has been announced is usually a good opportunity to cash out for traders looking for a quick buck. For example, LinkedIn stock surged about 50 percent when Microsoft announced an acquisition deal in 2016.
Long-term investors can hold on to stock after a buyout offer because they will likely receive a higher price when the deal closes than they would if they sell at the current market price. Also, it’s likely for another company to enter the scene with a better offer price.
What is a stock acquisition?
If it's an all-stock acquisition deal, the shares of the target company will be replaced by shares of the acquiring company. The ratio of the old shares to new shares might not be one-to-one since it would be based on factors like the relative stock prices of the two businesses.
How does a stock acquisition work?
A stock-for-stock acquisition takes place when shares of one company are traded for another during a merger. For example, Company A and Company B form a deal to undergo a 1-for-3 stock acquisition. Shareholders of Company B will get one share of Company A for every three shares they currently own.
Shares of Company B will stop trading on the exchange. The outstanding shares of Company A will increase after the deal is completed. The share price of Company A will be based on the market’s evaluation of the future earnings prospects for the combined entity.