What Is a Tender Offer?

What Is a Tender Offer?

Let me explain what a tender offer is: it's a public proposal to purchase some or all of a company's outstanding shares within a specific time frame at a price that's usually above the current market price.

In essence, a tender offer is a bid to buy stock from the shareholders of a corporation. These offers are made publicly, inviting shareholders to sell their shares for a specified price within a particular period. The price is typically at a premium to the market price and often depends on a minimum or maximum number of shares being sold.

To tender means to invite bids for a project or accept a formal offer like a takeover bid. There's also an exchange offer, which is a type of tender offer where securities or other non-cash alternatives are given in exchange for shares.

Companies can issue debt tender offers to repurchase or retire their outstanding debt and bond securities.

How a Tender Offer Works

A tender offer often happens when an investor proposes buying shares from every shareholder of a publicly traded company for a certain price at a certain time. The investor usually offers a higher price per share than the company’s stock price, which gives shareholders more incentive to sell.

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 to purchase outstanding stock shares for $18 a share when the current market price is only $15 a share. The premium is offered to encourage a large number of shareholders to sell their shares. In a takeover attempt, the tender may be conditional on the buyer obtaining a certain amount of shares, like enough to gain controlling interest in the company.

A publicly traded company can issue a tender offer to buy back its own outstanding securities. Sometimes, a privately or publicly traded company makes a tender offer directly to shareholders without the board of directors' consent, leading to a hostile takeover. Acquirers can include hedge funds, private equity firms, management-led investor groups, and other companies.

The day after the announcement, the target company’s shares usually trade below or at a discount to the offer price due to the uncertainty and time required for the offer. As the closing date approaches and issues are resolved, the spread typically narrows.

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 Note on Purchased Shares

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.

Example of a Tender Offer

Take this example: 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 because the investor is aiming to take over control of the corporation.

Advantages of a Tender Offer

Tender offers provide several advantages to investors. For instance, investors are not obligated to buy shares until a set number is tendered, which eliminates large upfront cash outlays and prevents investors from liquidating stock positions if offers fail. Acquirers can also include escape clauses, releasing them from liability for buying shares. For example, if the government rejects a proposed acquisition citing antitrust violations, the acquirer can refuse to buy tendered shares.

In many cases, investors gain control of target companies in less than one month if shareholders accept their offers; they also generally earn more than normal investments in the stock market.

Disadvantages of a Tender Offer

Although tender offers provide many benefits, there are some noted disadvantages. A tender offer is an expensive way to complete a hostile takeover because investors pay SEC filing fees, attorney costs, and other fees for specialized services. It can be a time-consuming process as depository banks verify tendered shares and issue payments on behalf of the investor. Also, if other investors become involved in a hostile takeover, the offer price increases, and because there are no guarantees, the investor may lose money on the deal.