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What happens when a bankrupt company is bought out?

What happens to the stocks of a bankrupt company if the company is bought by some other company?

For example, I want to buy stock in ACME Company. ACME is now bankrupt and is in the process of selling its operations around the globe. What will happen to the value of my stock if I buy ACME Company?

You should only consider buying a bankrupt company like ACME if another company is buying ACME as a whole. For example, IBM offered to buy Sun Microsystem for $9.40 per share.  Had the offer been accepted, all shareholders would have turned in their Sun Micro shares for that amount.

In your hypothetical case, no one has offered to buy ACME Company, so ACME Company is selling off parts of its business to satisfy creditors. ACME Company hopes to emerge from bankruptcy after reorganization.

Whether your stock in ACME Company will be worthless or go up will depend on how well ACME Company can reorganize and run their business after emerging from bankruptcy.

Also, keep in mind that most of the time, the current shares in a company will go to $0 and be cancelled. If the company reorganizes it usually will issue new shares. It is usually a bad idea to waste money on the current shares.

  • Shawn F

    A company files for bankruptcy because its debts exceed its assets. There is a hierarchy for repaying the debts with secured loans at the top and common shares at the bottom.

    A bankruptcy court will discharge debts to either allow the company to reorganize, to be sold to another company, or pieces to be sold off. Normally since common shares are the least likely to be repaid after bankruptcy, common shares are usually useless.