Tender Offer

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What is a 'Tender Offer'

A tender offer is an offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price.

Securities and Exchange Commission laws require any corporation or individual acquiring 5% of a company to disclose information to the SEC, the target company and the exchange.

BREAKING DOWN 'Tender Offer'

A tender offer is 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. For example, a stock’s current price is $10 per share. An investor wanting to take over the company issues a tender offer for $12 per share on the condition he acquires at least 51% of the shares.

Examples of a Tender Offer

A publicly traded company issues a tender offer to buy back its own outstanding securities. A privately or publicly traded company executes a tender offer directly to shareholders without the board of directors’ (BOD) consent, resulting in a hostile takeover.

Acquirers include hedge funds, private equity, management-led investor groups and other companies. The day after the announcement, a target company’s shares trade below or at a discount to the offer price. The discount reflects the uncertainty and time needed to complete the offer. As the closing date nears and issues are resolved, the spread narrows. If the spread grows, issues still exist that can lower the deal price or dissolve the offer.

Advantages of a Tender Offer

The investor is not obligated to buy shares offered by shareholders until a set number of shares are tendered. This eliminates the need for large upfront cash outlays and prevents the investor from liquidating a stock position if the offer fails. The acquirer can include escape clauses in the offer releasing liability for buying shares. For example, if the government rejects a proposed acquisition for anti-trust reasons, the acquirer can refuse to buy tendered shares. The investor gains control of a target company in less than a month if shareholders accept the offer. The acquirer can make more money investing in a tender offer than in the stock market.

Disadvantages of a Tender Offer

A tender offer is an expensive way to complete a hostile takeover. The investor pays filing fees to the Securities and Exchange Commission (SEC), attorney costs for document preparation and a proxy solicitation firm and tender offer specialists for services. A depository bank verifies tendered shares and issues payments on behalf of the investor, which is a time-consuming process. If another investor gets involved in a hostile takeover, the offer price increases further. The targeted corporation’s BOD will not continue working for a company after a hostile takeover. Because there are no guarantees with a tender offer, the investor may lose money on the deal.