03 Oct If Warren Buffett buys a company, what happens?

Q. If an investor like Warren Buffett decides to buy up a public company to take it private, and if one owns stock in the company, what happens to one’s position in the stock? Does it become worthless?
— Investor

A. Here’s the lowdown.

Shareholders or stockholders are the legal owners of a corporation, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

A shareholder owns one or more shares of stock, he said, and the words “shareholder” or “stockholders” are synonymous.

There are a few types of stock that a corporation may issue, such as common stock or preferred stock. We will keep this discussion on common stock.

Shareholders, as owners, elect the board of directors. The directors then hire the managers who run the business on a day-to-day basis. Directors are not employees of the corporation, but managers are. Normally, a shareholder gets one vote for each share they own, Kiely said.

One share, one vote.

He offered this example: If you want to be an owner of say, GE, you can buy as many shares you want on the open market.

“Corporations whose shares are traded in the open market are called publicly owned companies,” he said. “Companies whose shares are not sold in the open market are called closely held companies.”

Kiely’s firm, Kiely Capital Management. Inc., for example, is a privately-owned corporation.

“When you buy publicly owned shares, you are buying them from an existing shareholder who wants to sell,” he said. “The price is determined by supply and demand.”

The supply comes from owners who wish to sell and the demand comes from those who wish to buy. The constantly changing ratio of buyers to sellers is what makes the price of any given stock fluctuate on a daily basis, he said.

So to your question. You asked what would happen if Warren Buffet wanted to buy all of a company. Let’s use GE.

“He could approach the board of directors of GE and make an offer to the board,” Kiely said. “If the board accepted his offer, it would be a done deal. As a shareholder, you would get your share of what Buffett offered.”

But if the board said no and Buffett kept making offers, and if the board kept saying no, Buffet could make an offer directly to the shareholders without getting the board’s approval, Kiely said.

Shareholders are free to sell their shares to anyone they want, he said.

“Slowly shareholders would tender their shares to Warren Buffet. When Buffet’s ownership stake passes 50 percent of the outstanding shares, something magical happens,” Kiely said. “The `one share, one vote’ concept goes out the window. Buffet now rules.”

Now let’s imagine that every shareholder except for you sells their shares. You have 100 shares and Buffett has all the others.

“Who would want to buy your shares? Buffet controls the company; your 100 votes mean nothing,” he said. “Buffest could stop paying the quarterly dividend and there is nothing you could do.”

So to answer your question, if you held out, your shares would slowly lose their value, and ultimately, they would be worth zero, Kiely said.

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This post was first published in October 2017.