Facebook buying WhatsApp for 19 Billion. How are existing shareholders affected?
"The answer to your question has to do with the an explanation of ""shares authorized, issued and outstanding."" Companies, in their Articles of Incorporation, specify a maximum number of shares they are authorized to issue. For example purposes let's assume Facebook is authorized to issue 100 shares. Let's pretend they have actually issued 75 shares, but only 50 are outstanding (aka Float, i.e. freely trading stock in the market) and stock options total 25 shares. So if someone owns 1 share, what percentage of Facebook do they own? You might think 1/100, or 1%; you might think 1/75, or 1.3%; or you might think 1/50, or 2%.  2% is the answer, but only on a NON-diluted basis. So today someone who owns 1 share owns 2% of Facebook. Tomorrow Facebook announces they just issued 15 shares to Whatsapp to buy the company.  Now there are 65 shares outstanding and 90 issued. Now someone who owns 1 share of Facebook own only 1/65, or 1.5% (down from 2%)! P.S. ""Valuation"" can be thought of as the price of the stock at the time of the purchase announcement." It's a dilution of the ownership; the public used to own x% of Facebook and now they own less than x% of the bigger Facebook that incorporates Whatsapp (assuming that Whatsapp was completely private before). Logically, the $15 billion is allocated proportionately between the existing stockholders (x% of it for the general public, y% for Mark Zuckerberg, etc).  However it doesn't really make sense to think of it that way unless Whatsapp is actually worthless. What's important are the proportions. Suppose that the newly issued shares correspond to 25% of the previous share capital. Then previously the general public owned x% out of 100%, and now they own x% out of 125%, i.e. (0.8x)% of the new share capital. Whether the actual value of those stocks has changed depends entirely on the actual value that Whatsapp adds to the old Facebook. As Dheer says, only time will tell on that one. Apart from the financial consequences, dilution is sometimes considered important because it can mean a change in influence: a significant shareholder would often be able to encourage the company to act in a certain way. With a lower percentage ownership, that influence is diminished. isn't it still a dilution of existing share holder stock value ? Whether this is dilution or benefit, only time will tell. The Existing value of Facebook is P, the anticipated value after Watsapp is P+Q ... it may go up or go down depending on whether it turns out to be the right decision. Plus if Facebook hadn't bought Watsapp and someone else may have bought and Facebook itself would have got diluted, just like Google Shadowed Microsoft and Facebook shadowed Google ... There are regulations in place to ensure that there is no diversion of funds and shady deals where only the management profits and others are at loss. Edit to littleadv's comments: If a company A is owned by 10 people for $ 10 with total value $100, each has 10% of the share in the said company. Now if a Company B is acquired again 10 ea with total value 100. In percentage terms everyone now owns 5% of the new combined company C. He still owns $10 worth. Just after this acquisition or some time later ... Of course it is a dilution of existing shareholders. When you buy milk in the supermarket - don't you feel your wallet diluted a little? You give some $$$ you get milk in return. You give some shares, you get Watsapp in return. That's why such purchases must go through certain process of approval - board of directors (shareholders' representatives) must approve it, and in some cases (don't know if in this particular) - the whole body of the shareholders vote on the deal.
If you've got shares in a company that's filed for U.S. Chapter 11 bankruptcy, that sucks, it really does.  I've been there before and you may lose your entire investment.  If there's still a market for your shares and you can sell them, you may want to just accept the loss and get out with what you can. However, shares of bankrupt companies are often delisted once bankrupt, since the company no longer meets minimum exchange listing requirements.  If you're stuck holding shares with no market, you could lose everything – but that's not always the case: Chapter 11 isn't total and final bankruptcy where the company ceases to exist after liquidation of its assets to pay off its debts.  Rather, Chapter 11 is a section of the U.S. Bankruptcy Code that permits a company to attempt to reorganize (or renegotiate) its debt obligations. During Chapter 11 reorganization, a company can negotiate with its creditors for a better arrangement.  They typically need to demonstrate to creditors that without the burden of the heavy debt, they could achieve profitability.  Such reorganization often involves creditors taking complete or majority ownership of the company when it emerges from Chapter 11 through a debt-for-equity swap. That's why you, as an investor before the bankruptcy, are very likely to get nothing or just pennies on the dollar. Any equity you may be left holding will be considerably diluted in value.  It's rare that shareholders before a Chapter 11 bankruptcy still retain any equity after the company emerges from Chapter 11, but it is possible. But it varies from bankruptcy to bankruptcy and it can be complex as montyloree pointed out. Investopedia has a great article: An Overview of Corporate Bankruptcy.  Here's an excerpt: If a company you've got a stake in   files for bankruptcy, chances are   you'll get back pennies to the dollar.   Different bankruptcy proceedings or   filings generally give some idea as to   whether the average investor will get   back all or a portion of his   investment, but even that is   determined on a case-by-case basis.   There is also a pecking order of   creditors and investors of who get   paid back first, second and last. In   this article, we'll explain what   happens when a public company files   for protection under U.S. bankruptcy   laws and how it affects investors.   [...]   How It Affects Investors   [...]   When your company goes bankrupt, there   is a very good chance you will not get   back the full value of your   investment. In fact, there is a chance   you won't get anything back. [...] Wikipedia has a good article on Chapter 11 bankruptcy at Chapter 11, Title 11, United States Code. Yes!  One of his best and definitely his most prescient work.  What Vonnegut describes is happening right now -- look at Facebook, roughly a ~100 billion dollar company with and about ~3500 employees.  This is definitely the trend, generating a lot of value with few employees.    What do we do about those left behind?  I'm not sure, and Vonnegut definitely didn't give us the answer.  I keep hoping that there's a few savvy entrprenuers out there who are going to figure out how to add new value by finding ways to gainfully employ the chronically unemployed. What you describe there is the textbook definition of a proxy fight: buy a 5-10% stake (we're talking $10-$15 billion here for major money center banks), work with other shareholders, try to replace the directors, change business practices, etc. It's a strategy that works  in many cases, but the sheer amount of stock you'd have to buy to effect a traditional proxy fight makes this strategy neither probable nor plausible. Like I said, the only believable way to do this is a proxy fight via the press: buy a small number of shares, table resolutions at the annual meetings, and leverage those resolutions with the press. In simplest terms, when a company creates new shares and sells them, it's true that existing shareholders now own a smaller percentage of the company.  However, as the company is now more valuable (since it made money by selling the new shares), the real dollar value of the previous shares is unchanged. That said, the decision to issue new shares can be interpreted by investors as a signal of the company's strategy and thereby alter the market price;  this may well affect the real dollar value of the previous shares.  But the simple act of creating new shares does not alter the value in and of itself. I believe, I could be wrong, it has been a long day. By exercising this right you have the right to purchase the equivalent of their current share.  Eg. Someone owns 50 of 100 shares. and the company does a rights offering and is expanding the shares to 200. That person has first right to purchase 50 more shares to keep his share from being diluted. Yes. Instead of paying a cash dividend to shareholders, the company grants existing shareholders new shares at a previously determined price. I'm sorry, but scrip issues are free (for all ordinary shareholders) and are in proportion to existing share holding. No payment is required from shareholders. So instead of having 10 $1 shares, the shareholder (if accepts) now could have 20 50p shares, if it was a one-for-one scrip issue. FB's IPO was at exactly the right price.  The intent all along was to allow insiders to sell to retail bagholders, hence the large support by JPM to hold the line at $38.0000000, the absolutely legendary hype, and the unusual step of allowing retail in on it. FACE dropped its 10Q on 3/31/12  They reduced their total liabilities by 16%, reduced their accounts payable by 30%, looks like they eliminated their ST Debt, and increased their equity by 6%.  I'm not saying that they had a great quarter, but the numbers don't look to shabby. I don;t think you can accurately attribute the increase in their stock valuation to FB's IPO.