Understanding M&A, going private, & bankruptcy

00:00 Speaker A

Deals are back and this week, uh, Dr. Pepper unveiled an $18 billion bid for coffee maker, JDE Peets, and global M&A activity has already hit over two and a half trillion dollars this year. But what’s really behind a merger and acquisition or even a bankruptcy? On today’s Stocks and Translation, we’re going to turn headlines into your playbook and we’re going to break down what happens to your shares of a company when a big deal is made. Now, to begin with, we’re looking at three different types of corporate deals: going private, merger or acquisition, and finally, bankruptcy. We’re going to ask the same questions every time: what do you get and what do you do? So now, let’s open door number one, going private. This is when a company, a public company, is bought and leaves the stock market. Holders are paid in cash at a set price, and trading ends when the deal closes. What you see is a limited-time invite to sell your shares called a tender offer. It has a set price, and if too many people accept, you just get a partial fill. If you own the shares, you’re going to be notified, but pay attention to the deadlines to make sure you get what’s coming to you. A great example is Tesla. Remember 420? Funding Secured? That was a 2018 going private talk when Elon was dropping hints about taking Tesla private with Saudi money. Never got off the ground, but the mechanics are exactly this: a cash number, a clock, and a choice. Now behind number door, door number two, we have a merger or acquisition. It’s when another company buys yours, and you might get paid in cash or stock of the buying company. What you see is a merger announcement and the shareholder vote. And if there’s a choice to be made, you vote. Sometimes you can elect cash or stock. Sometimes you just have to roll with the punches. In cash deals, you’re going to get cash, and in stock deals, you get shares of the buying company. Sometimes, it is a mix of the two. And make sure to watch out for what’s called the record date, which is the cutoff for the votes to get the kits to vote. Also, you’re going to want to watch out for any election deadlines. A recent example is Microsoft buying Activision Blizzard. Mr. Softy or Microsoft announced it in 2022, then closed it in 2023 at $95 cash for Activision shareholders. Since they were cashed out, they did not get Microsoft stock. Now, finally behind door number three, guess what? We got bankruptcy. Real quick, there are two different types. Chapter 11 reorganizes the company and often cancels old common shares. Then you have chapter seven, which liquidates the entire company, and common shareholders are usually wiped out totally. What you see is a notice of either a chapter 11 or 7 filing, and sometimes the ticker gets a little Q at the end of it. It’s kind of like the scarlet letter for reorganization. And if you get access to this new bankruptcy ticker with the Q, your broker is going to show it automatically. Usually, there’s little or nothing for you to do, and some people trade the Q ticker in the over-the-counter market, but be careful, it’s very volatile and tied to court decisions, so traders are warned. Also, watch out for what’s called a plan approval, which is a court sign-off, and the cancellation or effective date when old shares officially disappear. Famous example is GM’s chapter 11 bankruptcy over the global financial crisis. The shareholders were wiped out in 2009, and this Max chart on your screen shows that trading started all over again with a 2011 IPO. Now, here’s a rapid-fire reality check in our final shareholder showdown. In a cash buyout, you’re going to get cash in a stock swap, and you also get shares. And remember, sometimes you can get both cash and shares. And then in bankruptcy, there’s really not much of a deal to be made with you, as you’re likely not going to get anything. Bottom line, remember to always look out for those shareholder notices in your email or physical mailbox. And any time you get cash, guess what? Uncle Sam is probably going to take a cut in taxes. New shares are often tax-deferred, but when in doubt, always talk to a pro. That’s all for today. And tune in to the Stocks and Translation podcast for more jargon busting deep dives. New episodes can be found on Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.

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