Preferred stock is a special class of security that is often issued by corporations offering company stock for public trade. Like all other types of securities issued by a company, preferred stock is a debt that must be accounted for during a corporate buyout or merger. What a preferred stockholder will receive in return for his investment during a buyout depends largely on other types of securities issued by the company and outstanding corporate debts.
Preferred stock is a type of equity security that is a financial hybrid of both bonds and common stock which can be issued for sale by publicly traded corporations. Like common stock, preferred stock receives dividend shares when a company decides to release dividends to corporate stockholders. Preferred stock can also come with a set of provisions that indicate a stockholder's corporate voting rights or whether the preferred stock may be converted into common stock at the holder's request.
Preferred stock inhabits a separate level of financial priority than common stock does. Whenever a company owes a financial obligation to all stockholders, owners of preferred stock will receive their dividends or other payments before owners of common stock. However, anyone holding a corporate bond receives financial priority over preferred stock owners. If bonds have not been used by a company to fund corporate debt, preferred stock will have the highest financial priority among equity securities issued by the company.
Buyouts and Mergers
When a company is bought or merges with another company, all types of stock, including preferred stock, must be satisfied as a debt during the transaction process. Sometimes, holders of preferred stock from the original company are offered preferred stock of equal value from the new corporation. Other times, preferred stockholders are bought out and paid an amount that generally reflects the fair market value of the stock. Buyouts involving companies that have declared bankruptcy or have advanced debt problems may result in preferred stockholders receiving no money for their investment if nothing is left after lenders and bondholders have been paid.
Preferred stock issued to venture capitalists typically has a liquidation preference that allows those investors to recoup money in the case of a buyout instead of equitable stock in the new company. Preferred stock can either be cumulative or non-cumulative concerning dividend payments. If a dividend payment is missed, dividends accrue for cumulative preferred stock and are paid when a company can release those funds; dividend payments missed for non-cumulative preferred stock isn't paid later. Preferred stock can also be issued by a company that is buying out another company as a form of private equity meant to leverage the buyout.
- Aspen Mergers & Acquisitions: A Preferred Stock Overview
- "The Wall Street Journal"; What Happens to Preferred Shares of Stock When a Company Capsizes?; Mary Pilon; October 2008
- Bank of America: 2004 Annual Report: Merger and Restructuring Activity
- Money-Zine.com: Leveraged Buyout
- Bank of America. "2019 10-K," Pages 1-2. Accessed Oct. 15, 2020.
- Georgia Power Company. "2019 10-K," Page 2. Accessed Oct. 15, 2020.
- MetLife. "2019 10-K," Page 271. Accessed Oct. 15, 2020.