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What Is A Tender Offer
In business, a tender offer refers to a situation when a person or company offers to purchase all the shares in another company.
Tender offers are generally announced publicly when the acquirer invites the shareholders of the target company to sell their shares at a certain price by “tendering” their shares before a certain time period.
In most cases, the acquirer will offer the target company’s shareholders a premium over the stock’s current market value enticing them to tender their shares.
When the acquirer submits a tender offer, it will likely include a condition where the shareholders of the target must tender a minimum number of shares so the acquirer can acquire a controlling interest in the target.
If the minimum number of shares is not tendered by the target’s shareholders, the tender offer bid will not go through.
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Tender Offer Definition
How do you define a tender offer?
According to the Securities and Exchange Commission, a tender offer is “a public bid for stockholders to sell their stock”.
In many cases, a tender offer starts when the bidder files a summary advertisement (also called a tombstone) in a major newspaper announcing its plans to offer to purchase the shares of the target company.
In essence, a tender offer is a public offer where one party, investor, business, or group, offers to purchase the shares in another entity.
The target company’s shareholders are invited to “tender” their shares (or sell them).
When Are Tender Offers Made
In most cases, a tender offer is made when a company is looking to acquire the shares of another company in a hostile takeover.
In essence, the acquirer is bypassing the target company’s board of directors and directly targeting the shareholders of the target company to sell their shares.
If enough shareholders in the target accept to sell their shares, the acquirer will end up purchasing a controlling interest in the target.
When a controlling interest is achieved, the acquirer will replace the target’s board of directors and put in place its management team to take over the control of the target’s business operations.
A publicly-traded company can submit a tender offer to buy the shares of another company or even its own shares (called an “issuer tender offer”).
How Does A Tender Offer Work
A “tender offer” is when a company or investor offers to purchase some or all of the shares of another company at a certain price if the shares are tendered prior to a certain date.
For example, Company ABC is interested in buying the shares of a publicly-traded company called Company XYZ.
Company XYZ’s shares trade at $50 per share on the open market.
Company ABC needs to purchase at least 51% of Company XYZ’s shares to achieve a controlling interest.
As a result, Company ABC will submit a tender offer to the shareholders of Company XYZ to buy their shares at a price of $65 per share (representing $15 above the current market price or 30% premium).
Company ABC offers a premium to Company XYZ shareholders to encourage as many shareholders to sell their shares.
Company ABC will also include a condition in its tender offer that at least 51% of the shares of Company XYZ must be tendered for the transaction to go through.
If more than 51% of Company XYZ shareholders sell their shares, Company ABC will have successfully acquired a controlling interest in Company XYZ.
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Tender Offer Types
There are essentially two main types of tender offers.
The first type of tender offer is when a third-party company, investor, or group offers to purchase the shares of another company.
In this context, the third-party bidder is potentially looking to acquire the target in a hostile takeover.
Very often, the bidding company had previously and unsuccessfully offered the target’s board an offer to purchase the shares of the company.
Now, they are attempting to get the shareholders’ approval to sell by bypassing the target’s board.
Another type of tender offer is when a company buys back its own shares, this is called an issuer tender offer.
An issuer tender offer, or corporate repurchase of shares, is primarily done to reduce the total number of shares outstanding in the market.
Pros And Cons of Tender Offers
What are the advantages and disadvantages of purchasing shares via tender offer?
The main advantage of purchasing shares via tender offer is that the acquirer solicits the shareholders of the target company directly without having to deal with a target’s board of directors.
This typically happens in hostile takeovers when the target’s board refuses to sell to the acquirer or rejects the acquirer’s offer.
Another important advantage is that the acquirer can include conditions and escape clauses allowing it to back out from the deal if certain conditions do not materialize.
For instance, a condition could be that a minimum number of shares must be tendered and the regulators must approve the acquisition in case there are antitrust or other regulatory concerns.
The main disadvantage of tender offers is that it can be a very expensive way to acquire the shares of another company.
In fact, the acquirer must pay significant legal fees to prepare the tender offer, must file legally mandated documents with the securities exchange, will have to pay professional fees to specialized firms handling the tender offer logistics, and so on.
Ultimately, a company may proceed with a tender offer and fail.
There are many tender offers that do not end up producing the expected results.
After having spent a lot of money, time, and resources on the tender offer, the acquirer may not be able to convince the shareholders of the target to sell enough shares.
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Tender Offer Regulations
Tender offers are highly regulated in the United States.
The bidder must observe the SEC rules and regulations when submitting a tender offer, such as:
- Disclosure requirements
- Offering periods
- Withdrawal rights
- Manner of publication
In the United States, the bidder must file a Schedule TO with the SEC when initiating a tender offer.
If the acquirer has purchased at least 5% of the target company’s shares, it must also file a Schedule 13D with the SEC.
Then, within 10 days from the commencement of the tender offer, the target must file a Schedule 14D-9.
Under the Williams Act, a tender offer must:
- Be registered under the federal laws
- Be disclosed in writing to the SEC
- Include an explanation of the source of funds used to acquire the shares
- Explain why the tender offer is made
- Announce plans if the tender offer is successful
- Disclose any agreements or understandings relating to the tender offer
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Tender Offer vs Exchange Offer
A tender offer is when a company bids to purchase some or all of the shares in another company.
When a tender offer is made, a company invites the shareholders of another company to sell some or all of their shares at a specified price before a certain deadline.
On the other hand, an exchange offer is a specific type of tender offer where the acquirer offers to purchase the shares of another company by using non-cash alternatives or through the exchange of shares.
Takeaways
So there you have it folks!
What does a tender offer mean in mergers and acquisitions?
A “tender offer” refers to a public solicitation by a company to purchase a substantial percentage of the shares in another company.
The bidding company is called the “offeror”, “bidder”, or “acquirer” whereas the company subject of the bid is the “offeree” or “target”.
Tender offers are usually open for a certain period of time before which stockholders can tender their shares (or accept to sell).
Also, the bidder will set a fixed price for the purchase of the shares which is usually higher than the target’s current market value.
It’s important that all tender offers follow the rules and regulations adopted by the local securities commission, such as the SEC, to ensure that the process is in compliance with the law.
Now that you know what is a tender offer, when it’s made, and how it works, good luck with your research!
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