Stock buyout offers arrive in your mailbox when one of two events transpire. They can happen when a publicly held company decides to go private or when a company attempts to take ownership of another by acquiring a controlling interest of its stock. The significance of either lies in the fact that a buyout offer affects you and your investment goals directly. Although a stock buyout or buyback offer – sometimes called a tender offer – can put money in your pocket, this is not always true. Good information and timing are the keys to making a wise decision on what to do when an offer comes your way.
Know Your Options
As a small investor you cannot prevent a buyout or buyback from occurring by refusing the offer. If you do not want the event to occur, you can only hope that large investors in the company band together and reach out to enough stockholders such as yourself to gain a controlling interest in the company. You do, however, have a choice of whether to accept the buyout immediately or wait until the deal closes and tender your shares at that time.
Evaluate the Offer
Read the offer to see if you have a choice over whether to tender all or just some of your shares of stock. While this may not be an option in a takeover war, you may have a choice in a buyback situation. If an option exists, decide whether holding onto some of your stock is of greater benefit in the long-term or if selling all your shares now is best. Keep emotions at bay – especially if this is a stock you like -- and look at the price you paid at the time of purchase. From there calculate the earnings per share on your investment. For example, if you purchased 100 shares of stock at $20 per share and the buyout offers you $30 per share, you receive a 50 percent return on your investment.
Use Good Timing
Plan carefully when deciding on the right time to sell. Start by comparing the buyout offer to the current market price per share. If the buyout offer is lower, there is a distinct possibility the deal may fall through, and waiting to sell until the buyout price rises or the deal closes may be the best option. If the offer is higher than the current stock price, accepting the offer immediately and then reinvesting your money elsewhere is the better way to go.
Rumors can run rampant in the months before you actually receive a buyout offer. Although this commonly leads to price spikes, it may be a tactic to force a stock price to rise. Sell your shares at this time if it makes sense according to your long-term financial goals and investment expectations, but don't buy more; now is not the time to buy. When rising stock prices occur due to rumors, the drastic fall that occurs if the rumor is false and the buyout or buyback never happens can result in a serious loss of your investment dollars.
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