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What Happens to a Company's Stock When a Buyout Is Announced?

Merger and acquisition activity is expected to top $4.3 trillion in 2015, the highest level since 2007. And if you haven't owned a stock that was acquired or that merged with another company before, it's almost certain that you'll experience it at some point in your investing career. So exactly what happens?

Here's a closer look.

The announcement
When a company announces that it's being acquired or bought out, it almost always will be at a premium to the stock's recent trading price. But depending on how the deal is being paid for, how long it's expected to take to close, and any speculation about a competing offer, a few things may happen.

For example, if a stock trades for $30 today and the company announces that it's being acquired for $40 per share in cash, the stock price will shoot up to near $40 the next trading day. However, it will typically trade for a little less than $40 for some time, gradually moving closer to the full deal price as the closing date of the transaction approaches.

It can get a little more complicated if a company is being acquired with stock, or a combination of cash and stock, since the value of that stock will also fluctuate from day to day.

For example, let's say Company A and Company B both have shares trading for $30 per share. If Company A buys Company B for one share of company A and $10 in cash, meaning $40 in economic value per share, company B's stock may shoot up in similar fashion as in the all-cash transaction described in the first example.

However, there will be more volatility, depending on the market's reaction, in terms of how it sees the deal affecting Company A. If Company A's stock falls by $5 on the announcement, it would have a negative impact on the value of Company B's stock. On the other hand, if the market views the deal favorably and Company A's stock goes up $5, then Company B's stock...