If Company is Bought what Happens to Stock: Everything You Need to Know
If a company is bought, what happens to stock depends on several factors. For example, in a cash buyout of a company, the shareholders receive a specific dollar amount for each share of stock they own. Once the transaction is completed, the stock is canceled and no longer of value as the company no longer exists as an independently traded company. 3 min read
Updated July 22, 2020:
Benefits and Disadvantages
- There are benefits to shareholders when a company is bought out. When the company is bought, it usually has an increase in its share price. An investor can sell shares on the stock exchange for the current market price at any time.
- The acquiring company will usually offer a premium price more than the current stock price to entice the target company to sell. Once the announcement is made, there will be an influx of traders to purchase at the offered price which, in turn, increases the stock's value.
- If the acquiring company offers to buy the target company for the price of one share plus $10 in cash and the shares are selling for $30, that equals a $40 economic value per share. This could result in the target company's stock increasing by that amount. In this situation, the market reaction to the acquiring company plays a role in market activity.
- It often happens that if there is even a whiff of a rumor of an impending buyout, investors begin to buy the stock before the buyout is announced and the price of the stock increases. When the buyout occurs, investors reap the benefits with a cash payment.
- During a stock swap buyout, investors with shares may see greater corporate profits as the consolidated company and the target company aligns.
- When the buyout is a stock deal with no cash involved, the stock for the target company tends to trade along the same lines as the acquiring company.
- A disadvantage to shareholders in a company involved in a buyout is that they are no longer shareholders in that company. This means if the long-term value exceeds the cash price an investor receives, they will not be able to participate or reap any rewards in the future.
- Investors will usually be responsible for paying income tax or capital gains tax on any cash proceeds.
- When a stock swap buyout occurs, shares may be dispersed to the investor who has no interest in owning the company.
- If the stock price of the acquiring company falls, it can have a negative effect on the target company. If the reverse happens and the stock price increases for the acquiring company, chances are the target company's stock would also go up.
- Impact of dilution is another effect caused by the amount of new stock that must be issued by the acquiring company to fund the acquisition.
- In the event there is speculation of a competing offer, the price may be affected, although this is usually minor.
- If a dividend is scheduled to pay between the date the transaction was announced and the closing date, there can be a decrease in the stock's price.
- The price of the stock may go up or down based on rumors regarding the progress of the buyout or any difficulties the deal may be encountering.
- Acquiring companies have the option to rescind their offer, shareholders may not offer support of the deal, or securities regulators may not allow the deal.
Cash or Stock Mergers
Public companies can be acquired in several ways; cash, stock-for-stock mergers, or a combination of cash and stock.
Cash and Stock - with this offer, the investors in the target company are offered cash and shares by the acquiring company.
Stock-for-stock merger - shareholders of the target company will have their shares replaced with shares of stock in the new company. The new shares are in proportion to their existing shares. The share exchange is rarely one-for-one.
Leveraged buyout - an acquiring firm can use debt as a means to finance the target company.
Cash - shares are purchased at a proposed price and are no longer in the shareholder's portfolio.
Tender offers - these offers involve a proposal by the investor to buy enough outstanding shares of the target company's stock to gain controlling interest of the company. This is sometimes considered a hostile takeover.
If you need help with answering the question, if a company is bought, what happens to the stock, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.