When a company decides to go public to raise capital through its initial public offering, it is relinquishing private ownership and adding numerous shareholders. These shareholders become owners of the publicly traded company. Occasionally, private investors or other companies may decide to try to buy a publicly traded company. If the purchase is approved, shareholders of that public company are compensated for their shares, and ownership changes to the purchasers.
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The merger and acquisition market is a huge sector of the financial industry. Investors, private companies and other publicly traded firms are all looking to earn abnormal returns on their investments. One of the ways that investors seek to earn a profit is through purchasing a publicly traded company. Many investors believe that if they were in charge of certain companies, they would increase efficiency and improve the profitability of that firm.
Board of Directors
When someone decides to buy out a publicly traded firm, they agree to purchase every share outstanding, usually at a premium price. For the transaction to go through, it must be approved by the board of directors of the publicly traded company. It is the board's fiduciary duty to represent the best interest of the shareholders. As a result, if the board feels that the shareholders are better off accepting the takeover bid than rejecting it, the board will approve the buy-out. A takeover can be either friendly or hostile, depending on the board's willingness to be bought out and the bidders' approach to the acquisition.
Because shareholders are the owners of the company, they get to participate in a vote that determines if the takeover bid is accepted or not. After the vote, it is still up to the board of directors to decide the fate of the acquisition. If the board goes against the wishes of the shareholders, often times they may end up losing their positions. Although accepting takeovers usually earns a profit to the shareholders, companies reject bids to create a bidding war or increase the offer price from the bidder.
When a company is purchased, each shareholder is compensated for their ownership in the company. The compensation is usually in cash. However, if the acquirer is also a publicly traded company, the shareholders may be compensated with more shares in the new company. Shareholders are almost always better off when a company they own is bought out. Because bidders tend to overpay and are already paying a premium price per share, shareholders earn an immediate profit on their investment.
Some investors buy a publicly traded company with the intention of taking it private. This is done to avoid costly regulations required of publicly traded companies. As a result, management has more time and more resources to focus on building their core business and creating sustainable growth. Some investors that purchase a publicly traded company and take it private will rebuild the company and then take it public again, hoping to capitalise on the improvements. This was the case in 2006, when Burger King went public again after being bought out by a private equity firm in 2003.
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