What is a Tender Offer?
A tender offer is a bid to purchase some or all of the shareholders’ stock in a corporation. Tender offers are typically made publicly and invite shareholders to sell their shares for a specified price within a particular window of time. The price offered is usually at a premium to the market price and is often contingent upon a minimum or a maximum number of shares sold.
To tender is to invite bids for a project or accept a formal offer such as a takeover bid. An exchange offer is a specialized type of tender offer in which securities or other non-cash alternatives are offered in exchange for shares.
Companies might also offer a debt tender offer to repurchase or retire their outstanding debt and bond securities.
Key Insights
- A tender offer is a public solicitation to all shareholders requesting that they tender their stock for sale at a specific price during a certain time.
- The tender offer typically is set at a higher price per share than the company’s current stock price, providing shareholders a greater incentive to sell their shares.
- In the case of a takeover attempt, the tender may be conditional on the prospective buyer being able to obtain a certain amount of shares, such as a sufficient number of shares to constitute a controlling interest in the company.
Unraveling How a Tender Offer Works
A tender offer often occurs when an investor proposes buying shares from every shareholder of a publicly traded company for a certain price at a certain time. The investor normally offers a higher price per share than the company’s stock price, providing shareholders a greater incentive to sell their shares.
Most tender offers are made at a specified price that represents a significant premium over the current share price. For instance, a tender offer might be made to purchase outstanding stock shares for $18 a share when the current market price is only $15 a share. The reason for offering the premium is to induce a large number of shareholders to sell their shares. In the case of a takeover attempt, the tender may be conditional on the prospective buyer being able to obtain a certain amount of shares to constitute a controlling interest in the company.
A publicly traded company may issue a tender offer with the intent to buy back its own outstanding securities. Sometimes, a privately or publicly traded company executes a tender offer directly to shareholders without the board of directors’ consent, resulting in a hostile takeover. Acquirers include hedge funds, private equity firms, management-led investor groups, and other companies.
The day after the announcement, a target company’s shares usually trade below or at a discount to the offer price, which is attributed to the uncertainty of and time needed for the offer. As the closing date nears and issues are resolved, the spread typically narrows.
Securities and Exchange Commission (SEC) laws require any corporation or individual acquiring 5% or more of a company to disclose their stake to the SEC, the target company, and the exchange.
Important
The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, like any other shareholder, has the right to hold or sell the shares at their discretion.
Practical Example of a Tender Offer
Imagine Company A has a current stock price of $10 per share. An investor, seeking to gain control of the corporation, submits a tender offer of $12 per share with the condition that they acquire at least 51% of the shares. In corporate finance, a tender offer is often called a takeover bid as the investor seeks to take over control of the corporation.
The Upside: Advantages of a Tender Offer
Tender offers provide several advantages to investors. Investors are not obligated to buy shares until a set number is tendered, eliminating large upfront cash outlays and preventing the liquidation of stock positions if offers fail. Acquirers can also include escape clauses, releasing them from liability for buying shares. For instance, if the government rejects a proposed acquisition citing antitrust violations, the acquirer can refuse to buy tendered shares.
Often, investors can gain control of target companies in less than a month if shareholders accept their offers. They also generally earn more than normal investments in the stock market.
The Downside: Disadvantages of a Tender Offer
Although tender offers provide many benefits, several noted disadvantages exist. A tender offer is an expensive way to complete a hostile takeover, as investors pay SEC filing fees, attorney costs, and other fees for specialized services. It can also be a time-consuming process, as depository banks verify tendered shares and issue payments on behalf of the investor. Additionally, if other investors become involved in a hostile takeover, the offer price increases. Given that there are no guarantees, the investor may lose money on the deal.
Related Terms: Shareholder, Takeover Bid, Exchange Offer, Debt Tender Offer, Hostile Takeover.
References
- U.S. Securities and Exchange Commission. “Tender Offers”.
