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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...


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