What Happens to the Price of a Stock Pending a Buyout?

In order to buy out a public company, a potential suitor must make a tender offer for the outstanding shares. Shareholders have the right to vote on any offer, which must be above the current market price to gain shareholder approval. The more profitable the company and the better its prospects, the higher the buyout offer must be. Shareholders who believe stock will rise in value anyway may not support giving up their shares, even at a profit. Any time a tender offer is announced, the stock will jump to a level at or very near the offer price.

If a majority of shareholders votes to approve the buyout, the deal will go through. If they reject the offer, however, the buyer must either improve his bid or terminate the offer. The stock price will generally follow the bid, and will also increase if competitive offers are made. In this situation, investors who already own the stock can expect volatility. The price will swing on rumors, media reports and news releases by the company and the potential buyers.

If the company's board of directors opposes the buyout, it can take evasive action and try to discourage the buyer. The board can delay or cancel shareholder votes, or get majority control of the voting shares in order to fend off a hostile bid. If this happens, shareholders can expect their shares to fall in value, as speculators hoping to make a quick profit on the buyout get tired of waiting for a resolution, sell their shares and put their money on another buyout candidate. Most company boards, when announcing a tender offer, will make a recommendation either for or against accepting it, which gives a good indication of how the buyout will go.

If the tender offer is accepted, then the price will stabilize. The market will value the shares at the tender price, assuming the buyer has the financing lined up for the purchase. If there is any kind of delay -- for example, due to government scrutiny of the deal -- the share price may drift downward as the market considers the chances of failure. If the buyer withdraws the offer or fails to get regulatory approval, shareholders can expect their stock to take a beating. The market price will fall to pre-buyout levels and may even sink further if the company is having financial problems.