When one company buys another, like Microsoft and Activision, where does the money go?

Question

When a deal like Microsoft buying Activision goes through, does the money that the company is paying go to the company being bought? Does it go to the shareholders? Does the Activision stock just go away?

The reason I am confused is, if Microsoft gives Activision billions of dollars, at the end of the day, isn’t Microsoft effectively giving themself billions of dollars?

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I’m using Microsoft and Activision as an example, but I am curious about how this works in general.

In: 2

Answer 1

When you buy a company you are basically paying off anyone else’s interest in the company. By interest, I mean owners. Say I set up a business and I have this killer idea. I hire a few people, we need to raise capital so we all throw in our own cash. When we do that, we are dividing the interest in the company by how much we threw in. Say it is an even split, it usually isn’t, but lets just say it is. Now the company gets REALLY successful, we are raining in profits, YAY! Now, someone comes into buy us, they don’t buy out our original investment, they buy out whatever percentage that investment was when we initially paid in at the current value. If I own a third, and the company is worth X millions, I am owed a 3rd of that if someone buys the company.

That is how Microsoft minted a millionaire chef, as Microsoft grew he bought shares that weren’t public, his money funded their growth. He had a stake in the company, however small. When they went public, he had to get paid proportionate to his ownership stake at the public offering price. Instant millionaire.

My friend ‘rode the rocket’ at the company she is now CEO of. When she first started they surveyed employees for investment dollars. She threw in, not a huge percent, but a bit. When they got bought out by a conglomerate, her $25,000 stake ended up being $323,000 plus a contract with the conglomerate. She doesn’t have an ownership stake anymore, because the owners are now the public investors of the purchasing institution. Part of her pay is stock in the parent corp with a sweet dividend, so she is basically set.