The merger and acquisition (M&A) market has really heated up on Wall Street in recent years. If you’ve never owned stock in a company that has been acquired, you may not be familiar with the process.
First of all, a buyout is typically very good news for shareholders of the company being acquired. Suitors tend to pay a significant premium to the target's current market price to ensure shareholders will vote to approve the deal.
For example, LinkedIn Corp (NYSE: LNKD) shares spiked nearly 50 percent when Microsoft Corporation (NASDAQ: MSFT) announced a takeover earlier this year. For traders looking for a quick buck, the time right after the buyout announcement is usually a good opportunity to cash out. However, long-term investors may wonder what happens to a stock that is bought out if they don’t actually sell the shares.
First, it may take quite a while for anything to happen at all. Once a deal has been announced, shareholders must vote to approve the deal, and regulators must clear the deal.
What happens next depends on the terms of the buyout. If the buyout is an all-cash deal, shares of your stock will disappear from your portfolio at some point following the deal's official closing date and be replaced by the cash value of the shares specified in the buyout.
If it is an all-stock deal, the shares will be replaced by shares of the company doing the buying. It’s important to note that the ratio of old shares to new shares is rarely one-to-one.
Of course, many deals include a combination of cash and stock as well.
For LinkedIn shareholders, the Microsoft deal was an all-cash acquisition, meaning shareholders received $196 cash for each share of LinkedIn they held. The LinkedIn buyout officially closed this week after regulatory approval from the European Union.
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