When companies are bought by other companies for exorbitant amounts of money, who receives the money in the end?


When companies are bought by other companies for exorbitant amounts of money, who receives the money in the end?

In: Economics

The person or people who owned the company before it was bought. This is most straightforward in the case of a private company. One person or a small group of people founded the company, and perhaps other people invested money in the company in return for an ownership share. These owners take the sale price of the company and divide it among themselves according to ownership share.

Public companies are the same idea but potentially more complicated because the company is owned by thousands of people instead of just a few. The key thing is that if someone owns 51% of the shares in a public company, they have the power to make any decisions they want about it. Often when one company buys another, what they’re really doing is buying 51% of the shares. This can come from buying out a few people who own a lot of shares (founders will often retain a large ownership stake even after the company goes public) or by offering to buy shares from the public at a generous price. Either way, it’s likely that some people who own a stake in the company won’t participate in the purchase or make any money from it. They continue to hold their shares even as the controlling stake transfers to the new “owners”. On the other hand, they will continue to receive a share of the profits made by the company and retain the right to sell their share in the future.

When a company is created, it’s like a pizza. If only one person created the pizza, then that person owns the whole pizza. Sometimes, two or more people make a pizza together. If, for example, 3 people make a pizza, then they each might own one third of the pizza. That’s not set in stone though. Those three people might have agreed to split the pizza 60%, 20%, and 20%. Each of these 3 people, no matter how small the percentage is, is what’s called a shareholder. As the value of the pizza increases, the shareholder’s section of the pizza is worth more too.

Shareholders can sell parts of their section of the pizza. If I own two slices of pizza, I can sell one slice to my friend. But now I have less pizza.

Sometimes, someone or a group of people make an offer to purchase the entire pizza. In that situation, every single slice of pizza is sold unless otherwise agreed, and each shareholder gets a portion of the purchase price equal to their share percentage. The person who owned 20% of the pizza before it was sold will be paid 20% if the purchase price (after taxes, settlement fees, payoffs etc of course).

If it is for cash and one person owns the company, that person gets the money. If it is a public company the bond holders get paid for their bonds then the stock holders. Normally the buy out is a bid for the stock, but the majority of the stock holders have to agree. So they have to give a big price, like $120 a share for stock that was selling for $80.

More likely it is not a buy out for cash, but an exchange of stock. Company A buys Company B, by trading the shareholders A stock for their B stock. So Company B disappears and becomes part of Company A and everyone owns Company A stock.