What Is A Stock Buyout?

What Is A Stock Buyout?

The stock market is home to a wide variety of companies, from small startups to multinational corporations. Individuals and institutions flock to the market to buy and sell stocks every day. If you have had any experience with the stock market, you may have seen certain companies disappear from the market entirely, or their stock prices suddenly jumping and staying at the same level for a period of time. 

Such occurrences happen when one company decides to initiate a stock buyout of another listed company. This can be for many different reasons, maybe the public company is not really benefiting from being listed on an exchange and all the fees and regulations that come with it, or maybe the management of the business can no longer properly run the company and an overhaul is due. 

One way or another, buyouts are a crucial part of a functioning stock market and larger players often buyout smaller companies to expand into new markets or to bolster their presence on existing markets. 

If you are a beginner trader and would like to know more about how buyouts work and how they affect the stock market, this Investfox guide is for you. 

How Stock Buyouts Work

Stock buyouts, also known as mergers and acquisitions (M&A), involve one company acquiring another, which often leads to changes in the ownership structure and stock prices of the involved companies.

This is one of the most important pieces of news that can emerge regarding both the acquiring and the target companies. Here’s how stock buyouts typically work in steps:

  • Announcement: The process typically begins with an announcement by one company (the acquirer) that it intends to purchase another company (the target). This announcement can be made publicly, and it often includes details such as the purchase price, terms, and the intended impact on the target company
  • Due Diligence: Both companies conduct extensive due diligence to assess the financial health, assets, liabilities, and potential synergies of the deal. This step is crucial for valuing the target company accurately
  • Negotiation and Agreement: The two companies negotiate the terms of the deal, which may include the price to be paid, the method of payment (cash, stock, or a combination), and any conditions that need to be met. Once an agreement is reached, it is typically subject to approval by shareholders and regulatory authorities
  • Shareholder Approval: In most cases, shareholders of both the acquiring and target companies need to vote and approve the merger or acquisition. The level of approval required may vary by jurisdiction and the corporate structure of the companies involved
  • Regulatory Approval: Depending on the size and nature of the deal, it may require approval from regulatory bodies to ensure that the transaction complies with antitrust and competition laws. In the United States, for example, this may involve review by the Federal Trade Commission (FTC) or the Department of Justice (DOJ)
  • Closing the Deal: Once all conditions are met, the deal is finalized, and the acquiring company takes ownership of the target company. Shareholders of the target company often receive compensation according to the terms of the deal, which may include cash, stock, or a combination of both

Impacts On The Stock Price

When the news of a stock buyout reaches the market and if the acquiring company is also publicly listed, two things tend to happen:

  1. The stock price of the target company increases as the buying company typically pays a premium for the shares of the target company
  2. The stock price of the acquiring company decreases as acquisitions and buyouts typically involve debt, as well as the added risk to the overall company by introducing a new business to its daily operations 

Such occurrences are common on the stock market when the buyout happens between two publicly listed companies. However, private companies, such as venture capital firms can also buyout public companies, which only affects the target company’s stock price. 

Example: Maxar Technologies (MAXR)

To better understand how stock buyouts affect the target company’s stock price, we can look at the example of Maxar Technologies, a spatial technology company that was acquired by the private equity firm Advent International, which was finalized on December 16, 2022.

Here’s how the deal affected MAXR stock, which is now delisted from the Nasdaq:

maxar stock.png

As we can see, the stock price shot up at the news in December and the stock was officially removed from the market in May 2023. The chart also shows that Advent International paid roughly double the going stock price to acquire Maxar Technologies.

Key Takeaways From What Is A Stock Buyout

  • A stock buyout is a process where one company buys a publicly listed company through share purchases
  • Stock buyouts affect the share price of the target company, as the buying company typically pays a premium 
  • When a stock buyout has been finalized, the target company is delisted from the exchange and the buying company assumes ownership
  • There have been numerous stock buyout examples over the year,s with Maxar Technologies being a notable recent example 

FAQ On Stock Buyouts

How do stock buyouts work?

Stock buyouts, or mergers and acquisitions, involve one company purchasing another. It begins with an announcement, due diligence, negotiation, shareholder and regulatory approvals, closing the deal, and integrating the acquired company, affecting stock prices.

What happens to a stock during a buyout?

During a buyout, the stock of the target company typically experiences a price increase, approaching the acquisition price. The stock of the acquiring company may initially drop due to integration concerns.

Are stock buyouts regulated?

Yes, stock buyouts are regulated by securities and antitrust authorities in various jurisdictions. Regulatory oversight ensures compliance with laws and regulations related to mergers and acquisitions, including antitrust and shareholder protection rules.