Stock Buyouts/What happens?

Specifically in the case of Yahoo -

If someone were to buy Yahoo's stake in Alibaba for example, then Yahoo would almost surely distribute the cash they receive to shareholders as a special dividend. Your share price would drop by the amount of the special dividend.

If Yahoo was bought as a whole, it probably depends on who is buying them. I think that right now there are two consortiums out there who are interested in buying Yahoo and both of them are led by private equity firms. That means that it would be an all-cash offer and shareholders would receive cash for their shares at a premium to market prices but if you are thinking $30/share, you are dreaming. If MSFT bought them (as they offered to do a few years back but are not really interested in now) then the deal would probably be largely stock in which Yahoo stockholders would receive shares of the acquirer. There are, of course, hybrid deals in which shareholders receive stock and cash and even deals in which you can choose stock or cash (receiving cash is a tax event and receiving stock may not be).

I actually think that a Yahoo takeover is not especially likely anytime soon even though there has been lots of speculation about it. I believe this because:

a) The Board doesn't want to look foolish accepting an offer lower than MSFT's $31 (I think) offer a few years back and they haven't a chance in heck of getting that.

b) Any acquirer would want to replace the management of Yahoo who have done lots of value destruction.

c) The search engine licensing deal with MSFT has destroyed the value of Yahoo's intellectual property to anybody who wanted to take it over. I think that avoiding takeover was a partial motivation for that deal.

d) I think Yahoo is going through a brain drain that makes the company less valuable. Companies going through employee exodus never end up looking very good on due diligence.

I really like Yahoo and have for years, but the current state saddens me.

Edit: The second question was what happens to your stock when they buy out another company. First off, that is not happening in a significant way with Yahoo. But in general the answer is that the character of your company changes because it has added a completely new entity to the books. The market will evaluate the purchase and the changed financials of the company and then the share price will reflect that evaluation. The result has ranged all over the map.

In particular, when this happens the purchase price of the new company is almost always greater (sometimes much greater) than the accounting value of the target's assets minus its liabilities. That differnce is called "goodwill". People like me think that goodwill is the most bogus of all possible assets and routinely talk down companies with lots of goodwill on the books. For example, Green Mountain Coffee Roasters purchased several other coffee makers in the last couple of years and I have felt that the purchases were ludicrous to criminal. The stock price went up anyway.

There are all kinds of tricks around buying companies. Years back if you werre a growth company you could inflate your stock price by buying a non-growth cash cow so we had companies like XENON Space Age Widgets buying Ma's and Pa's Grocery store and suddenly it looked like XENON had great cash flow through space age widgets casunig the share price to go up. If your company is acquiring lots of other companies, you have to evaluate the plans all the time.

Edit: If Yahoo is purchased completely, you would almost certainly make a profit. If someone purchases a big chunk of Yahoo, it's not so clear. You would get a check, but your stock price would drop. In the particular case of Yahoo, there are some crazy arrangements with those Asian assets in which they can be bought back if something happens to Yahoo. I can't remember the details, but Yahoo has been very careful not to trigger those clauses because the buyback would represent a significant loss to Yahoo. That's kind of the minutia - if Yahoo is take over = good for you. If Yahoo sells assets = probably not bad for you but you have some cash you need to reinvest.

When X company takes over Y company through whatever means, either by cash or stock swap, if successful, the Y company's assets would go to X, including cash. This is why when a company has too much cash and not contemplating to spend it, that company would issue special dividend to distribute the money to the shareholders, just to avoid being the take over target. Ask Joey V has explained, the stock price will drop.

While you are holding some Yahoo shares, during the course of the take-over, your brokerage would send you a notice asking you to tender the shares at a predetermined price. You don't have to if you do not like the deal. However, if the take-over requirement is met, enough shares have been acquired by the X company ( 50% + 1 won't do it, it's more like 85% + ), on the closing date, the shares in your brokerage would be disappeared and instead, there are cash or X company's shares or a combination of both, whatever the predetermined offer is, would be entered into your account.