What happens to public shares if a company is bought out?

Question

What happens to stocks you purchased if the company is taken over and made private? Take, for example, Twitter. I read from the news "Musk will pay $54.20 a share for Twitter". But currently the price for Twitter is sitting at $52. Doesn't this guarantee a gain of $2.20 per share? If so, why aren't investors buying in?

Answer 1

If the company is bought out, all the public shares are acquired. At some point remaining shareholders are compelled to sell. This is known as a squeeze out and leads to the new owner owning 100% of shares.

You can gain $2.20 on Twitter shares if the sale actually goes ahead. There is some chance it doesn't, e.g.:

• Musk changes his mind about the acquisition (this would trigger more clauses in the agreement).
• The SEC (aka the law/regulators) blocks the deal.
• Shareholders vote against selling. Right now Musk doesn't own the requisite 50% to force a squeeze out; if the remaining shareholders are against selling they could stop the acquisition.

Etc.

If you believe these things won't happen then yes, it's $2.20 profit. But if they do, TWTR is likely to crash, and you'll suffer a loss. Ultimately, it's your risk to take.

Edit: Musk says $44 billion Twitter deal on hold over fake account data illustrates the danger of speculating on this. TWTR dropped 20% in the wake of that announcement, although it later regained some ground when Musk said he's still committed to the deal. TWTR is still well below the proposed takeover price though, indicating that the market considers the proposed takeover less likely than it did in April. As mentioned above, ultimately it's your risk to take.

Answer 2

But currently the price for Twitter is sitting at $52. Doesn't this guarantee a gain of $2.20 per share? If so, why aren't investors buying in?

Even if the sale ultimately happens, it can take weeks, months, or even years.

Not all announced deals happen. Some are stopped by the company being bought. Some have the financing fall apart. Others are stopped by the national governments involved.

Sometimes the announced deal doesn't happen because another company/investor bids a higher amount.

People who own shares now have to decide if they want to wait or sell. Those who don't own have to decide if they want to buy and hope the deal takes place, or an even better one comes along.

What happens to stocks you purchased if the company is taken over and made private?

There will be a processes that has to be followed for the board/shareholders to approve the deal. If that happens then all the shares will be purchased at the specified time schedule. Mutual funds will also have to sell their shares. Shares owned in taxable and retirement accounts will also be sold.

Once that happens it will no longer be listed on any stock exchange, and will disappear from all indexes.

By being made private the number of remaining shareholders will be very small. It can be more than one. Once they are private the need to report profits and losses to the public disappears.

Answer 3

After both firms surrender their current shares, the new company created as a result of the M&A will issue new shares. The shares of the acquiring company are unaffected in the event of an acquisition. When a firm is acquired, its stock is no longer traded on the market.