A buyout, also known as a merger or a takeover, usually requires the approval of the boards and shareholders of both companies. Most buyouts are friendly in nature, whereby the companies negotiate the details of the transaction before announcing it publicly. The formal announcement of a merger causes an immediate reaction in the stock price of both companies -- usually the target company's stock price rises and the acquiring company's stock price falls. Investors can sell their stocks after a buyout is announced or wait to formally tender their shares as part of the merger process.
Read the proxy statement. Public companies are required to send proxy statements to their shareholders describing the terms of any proposed merger agreement and the date of a special annual general meeting to approve the merger. Shareholders who cannot attend a shareholder vote in person can mail in or electronically record their votes, or they can designate someone to vote on their behalf. The shares in your company will continue trading and you can sell your stock at least until the buyout receives shareholder and regulatory approvals.
Explore arbitrage possibilities, which means profiting from share price fluctuations. These possibilities exist because the merger may not be approved, which can lead to a fall in the share price. This can benefit investors who have short sold the stock. A short sale involves borrowing stock from the broker and selling it, hoping to buy it back at a lower price and profiting from the difference. If there are multiple bidders, shareholders can benefit because the bidders might try to outbid each other until one bid is accepted. The most profitable arbitrage strategy, of course, is to correctly anticipate companies that are potential takeover targets and buy shares in them in advance. Friendly mergers usually do not present arbitrage opportunities once a deal is announced.
Select the buyout option. A buyout offer may be for cash, stock or a combination of cash and stock. If you have not sold your shares and the buyout is approved by shareholders, you have to tender your shares according to the instructions on the proxy statement. The brokerage firm where you do your trading should provide information on the process, but it is usually simply a matter of calling and giving instructions. For example, if a buyout offer includes an option of either cash or a combination of shares plus cash, tell the broker which option you would prefer and the broker will take care of the rest. There is usually a default option for people who do not provide specific instructions for their shares.
Tips & Warnings
- The market might be concerned that the acquiring company is diluting its shares by overpaying for the target in stock or paying too much in cash. In either case, the stock price of the acquiring company likely will fall. The target company's stock usually rises on merger news. However, if the bid is for less than the market's expectations, its price might fall sharply.
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