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.
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Company-A has many shareholders.
When Company-B “buys Company-A” what is actually happening is that they are buying **ALL** of the Company-A stocks and then dissolving the company once they have full ownership.
So, whoever owned Company-A stocks is paid for each share.
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It is usually more complicated than that, though, because most companies don’t want to spend all their cash on a buyout like that… so there is usually a lot of finagling over “We’ll give you $X cash and $Y worth of Company-B shares for each Company-A share.” and that kind of thing happening along with giving large shareholders board seats or whatnot in order to secure enough shareholder “Yes” votes to complete the sale.
If you go to the store and buy an apple for $5, where does the money go? To the person who originally owned the apple: the storeowner.
It is the same concept. if you buy something, there was a previous owner and that is where the money goes. In the case of buying another company… the previous owner could be a singular person, could be several people who own certain shares, or it could even be a whole other company.
That is why people who start companies and then sell them walk away with a big check. They were the previous owner, and they received the money from the buyer.
Everyone here is missing a major piece of the equation.
Typically, when there’s a corporate buyout like this, the first people paid off are the banks and hedge funds that own the debt (ELI5: because almost always the debt contains a clause that says, “If you undergo a buyout I must be paid off in full or else that is a default which gives the ability to make your life really hard”). Once that is paid off, then what’s left goes to the equity holders. Also some of it will go to financial and legal advisors’ fees.
>Does the Activision stock just go away?
Yes. Let’s say MSFT prices at $100 per share, and you own 1 share of Activision in your brokerage account. When the deal settles, you will log in one day and will have no shares of Activision but $100 more in cash. Sometimes they also do stock deals, so if that is the case let’s say they do a deal of 2 shares of MSFT for every share of Activision. When the deal settles, in your account your Activision stock will have gone away but there will be two MSFT shares.
>isn’t Microsoft effectively giving themself billions of dollars?
No. Think of it like selling a car to MSFT. You have a car, MSFT has $100. After the deal, MSFT will have the car and you will have $100. It’s the same way, just instead of a car it’s stock.
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