What Happens When a Publicly Traded Company Is Bought Out by Investors?

You may have seen reports in the news about big companies being taken private by wealthy investors, hedge funds or private equity firms. When this happens to a company that was publicly traded on the stock market, it can often mean a big cash payout for investors who own the company's stock.

Private investors will sometimes buy a publicly traded company, either seeing it as a solid, long-term investment that they can get at a good price or planning to make changes to make the company more profitable, sometimes even planning to resell it or again take it public in the future. Privately held companies are generally subject to fewer regulatory requirements than those traded on public markets, so this can mean additional savings.

Either way, a company going private usually means a payout for existing shareholders. The majority of shareholders will typically have to approve such a deal, which means that buyers will often have to offer a premium above the stock's current price to get the deal through. Sometimes the investors buying the company will borrow money to do so in what's known as a leveraged buyout, planning to use the company's earnings to pay back the debt. If the buyout takes place despite the opposition of the company's managers, it's known as a hostile takeover.

If you're a shareholder in a company going through this process, you might receive letters in the mail urging you to vote a certain way or to give your "proxy" to people, allowing them to vote on your behalf. The stock price may go up as soon as the deal is tentatively announced, so you may be able to make money on your investment before waiting for the deal to fully close.

Once the majority votes to accept the deal, though, investors often have no choice but to allow their shares to be swapped for cash. Typically, if you hold shares through a brokerage, this will happen more or less automatically, and you will find your shares replaced by cash in your account.

If you own stock in a company that is bought out for cash, you may owe tax on your profits for the time you've owned that stock, just as if you had sold your shares through your broker. If you've held the stock for longer than a year, you can generally pay the lower long-term capital gain rate. If your shares are held through a tax-sheltered account like an IRA, you generally won't owe any tax because of such a buyout.