A tender offer is a bid to buy all or some of a shareholder’s stock in a corporation. It is common practice for tender offers to be made publicly and for shareholders to be invited to sell their shares for a specified price and within a set timeframe.
The price offered is usually at a premium to the market price and is conditional upon a minimum or maximum number of shares sold. For example, a company has a share price of $10, an investor looking to gain control of the corporation submits a tender offer of $14 per share on the condition that they acquire at least 51% of the shares.
How a tender offer works
When an investor submits a tender offer they offer a higher price per share than the market price to make it attractive to shareholders to sell their stock. This is particularly true in the example above where an investor was seeking to gain control of an organization and required a minimum of 51% of the shares.
In other scenarios, a publicly traded company may issue a tender offer with the intent to buy back its own outstanding securities. Tender offers may also be executed directly to shareholders by privately or publicly traded companies and without the board of directors’ consent, this is known as a hostile takeover.
Whether an individual investor or a corporation, when 5% or more of company shares are acquired information must be disclosed to the Securities and Exchange Commission (SEC), the target company and the exchange.
Types of tender offers
There are two main types of tender offers, issue tender offers and third party tender offers. Issue tender offers are when a company offers to buy shares back from shareholders and is also knows as share buybacks.
Third party tender offers are when an investor or a company submits a tender to buy shares, often for the purpose of gaining the controlling share in a company they want to take control of.
Advantages of a Tender Offer
The advantages of a tender offer include:
Get a good return on stock you hold
As a shareholder, if you decide to sell your shares as part of a tender offer you will likely get a better return than if you sold them on the broader market. Investors or companies that submit a tender offer usually offer a premium share price to offer an incentive for shareholders to sell.
Gain the controlling share
As an investor or company submitting a tender offer you could gain the controlling share of a company if you are able to purchase more than 51% of the company’s shares. This will give you control over how the company is run and the decisions it makes.
Disadvantages of a Tender Offer
The disadvantages of a tender offer include:
Shareholders could miss out on growth
Shareholders that opt to sell their shares as part of a tender offer may get a favorable price for their shares, but they could also miss out on future growth opportunities. For example, if in 12 months the share price doubles, those who sold their shares will have missed out on the growth.
Can be costly
For investors looking to submit a tender offer to undertake a hostile takeover, it is important to note that it can be costly. Investors will have to pay SEC filing fees, attorney costs and other fees for specialized services.