Tender Offer - Explained
What is a Tender Offer?
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Table of ContentsWhat is a Tender Offer?How is a Tender Offer Used? Types of Tender OfferBuyback Tender OfferWays of Carrying Out a BuybackReasons why Companies Carry out BuybacksPros of a Buy BackCases Where Tender Offers is UsedAdvantages of Tender OffersDisadvantages of a Tender OfferAcademic Research on Tender Offer
What is a Tender Offer?
A tender offer refers to a bid made public and mostly by way of a newspaper to invite prospective stockholders to tender their stock for sale. It is an offer to purchase a number or all of the shareholders shares in a corporation. The tender offer is offered at a specified price and for a predetermined time. Generally, the tendering process is subject to a minimum or a maximum number of shares. In a tender offer, the bidder is required to reach out to the shareholders directly to convince the shareholders of the underlying company to sell their shares. The acquirers price offer, in this case, must be at a premium (the best) to the current market price or trading price in order to persuade the shareholders to give out their shares for sale.
How is a Tender Offer Used?
Alternatively, a tender offer can be explained as a proposal made by an investor or a group of investors to the shareholders of a publicly traded company. Also, It means a Taking Overbid. This is because the investors intention is usually to take over control of the company. However, the tender offer is not restricted to one person or entity but can be made by more than one person or entities. Thus, the offer can be placed by; an individual, a business or a group of investors who want to acquire a given amount of securities in a target company. According to Securities and Exchange Commission (SEC) laws; a corporation or an individual who intend to acquire 5% of the company should give out information to the SEC, on the company he is targeting to buy shares from and the proposed exchange rate. For instance, if the target companys current stock exchange rate is going at USD $20 per share, then the acquirer might offer USD $25 per share to the shareholders as long as the majority (51%) of the shareholders agree to those terms. The basic rule about a tender offer is that you buy a large number of shares at a price which is considerably higher than the current stock market price. The business or the group of investors intending to buy the shares should be willing to pay the shareholders a higher price than the current stock market rates.
Types of Tender Offer
This is a mandatory bid rule that requires a stakeholder who establishes new control or acquires more than thirty percent of the company shares, to buy the remaining shares on the same good terms as the previous purchase. The person making the offer, in this case, is forced to make it for the rest of the shares of the target company. This happens because if not done, the majority of investors can use the right to vote at the annual general meeting to their own advantage at the expense of the shareholders.
This is where a firm chooses to make a tender offer out of its own free will. There are usually no external or internal forces to initiate the tender offer.
- Friendly Tender Offer
In this kind of tender, the board of directors (BOD) are usually informed about the intention to make an offer for the outstanding shares of the target company. The board can then further go ahead to inform the shareholders about the intentions. It is then the obligation of the BOD to advise the shareholders if they should accept or refuse the offer. If the board recommends the offer to be good and the shareholders accept to sell out their shares, then this becomes a friendly offer.
- Hostile Tender Offer
This is where the person making the offer does not inform the BOD of the target company about his or her intention to tender offer. In this case, the person with an intention to buy shares continues to make the tender public without caring about the opinion of the board regarding the price of the shares being offered. In this case, there is no consensus between the two hence making the offer hostile.
This where there is an offer to acquire less than five percent of the companys stock. This is usually done directly from current investors. Mini-tender is not subject to regulation by the Security Exchange Act for there are no requirements cited in the disclosure.
Buyback Tender Offer
This is where the company purchases its stock from the current shareholders usually at the best price than that of the current market price. When a company buys back, the number of stock that is remaining in the market reduces.
Ways of Carrying Out a Buyback
- Shareholders may be given tender offer and given a choice to submit part or all of their shares within a certain period of time and higher to the current market. The higher price is meant to reward investors for giving out their shares rather than holding on them.
- Another way of the buyback is where the firms buy back shares on the open market over a given period of time.
Reasons why Companies Carry out Buybacks
The following are reasons why companies would want to buy back the stocks:
- To be able to support the stock price during a slow market condition.
- They do it to be able to stop taking over bids from hostile investors.
- So as to increase the earnings of each stock.
- To ensure that there is merging of the stake in the company
- To be able to achieve the most favorable capital structure.
Pros of a Buy Back
- It is an easy way of reducing capital without requiring the courts consent.
- It prevents investors with ill intention from implementing take over bids.
- To improve on the price of per stock.
- To give and another way out to the shareholders when there is low value on the shares being traded.
- To support the price of stocks during a period when the market condition is slow.
Cases Where Tender Offers is Used
- It can be used when the investors or the acquirers want to take over the control of the company so that they can be able to save the current BOD and the executives from being kicked out of the company. If they are able to take control of the company, then their vote to retain the current management and board will count since they will be now the majority shareholders.
- Used when the hostile corporate raiders want to take over the companys valuable assets. In this case, they will target to buy a considerable large number of shares in the targeted company so that after they are in full control, they can then start selling the valuable assets owned by the company one by one.
- It can also be used with good intentions. For instance, when well-meaning investors are tired of seeing a certain company being mismanaged. When individuals from inside are incompetent and use the companys resources to enrich themselves while the shareholders are not enjoying any returns. In this case, they will want to buy the shares so that they can get the opportunity to kick out the current management and the BOD.
Advantages of Tender Offers
Tender offers have the following advantages to the investors:
- The investor who is buying the shares is able to own a large percentage of the shares of the existing stock, he or she can easily force all the remaining stockholders to sell out their shares. This means that he or she will be able to make the company private or can merge it to the publicly traded business.
- Investors earn more than normal investments in the stock market once they are able to convince the shareholders to sell out their shares.
- Investors are not obligated to buy shares until a certain threshold of tender is reached. This saves the investor from spending a large amount of cash upfront. It also prevents the investor from liquidating stock positions in case the offer doesnt go through.
- In tender offers, the investor is eligible to include clauses that issue liability for purchasing shares. In this case, if the government for instance, happens to reject a proposed acquisition because of antitrust violation, then the investor is free not to buy the tendered shares.
Disadvantages of a Tender Offer
- There is a possibility of an investor losing all of his investment. This is so where an investor becomes involved in a hostile takeover. In this case, if the offer price increases, the investors lose money on the deal. This is because when the bid is done, there is usually no security to your investment.
- Tender offers require a time investment. It is not a one-time thing but a process. In this case, an investor will need to wait for the depository bank to verify tendered shares so that it can issue payments on behalf of the investor. All this process may consume some considerable amount of time.
- It is expensive where the investors intend to implement a hostile takeover. This is because for the process to be complete, the investor will need to use some considerably large amount of money. For instance, the investor will have to pay filing fees for SEC, meet attorneys costs and any other special services fees that will be required of him.
Academic Research on Tender Offer
- Do outside directors monitor managers?: Evidence from tender offer bids, Byrd, J. W., & Hickman, K. A. (1992). Journal of financial Economics, 32(2), 195-221.
- The proper role of a target's management in responding to a tender offer, Easterbrook, F. H., & Fischel, D. R. (1980). Harv. L. Rev., 94, 1161.
- Determinants of tender offer postacquisition financial performance, Fowler, K. L., & Schmidt, D. R. (1989). Strategic Management Journal, 10(4), 339-350. Predicting tender offer success: A logistic analysis, Walkling, R. A. (1985). Journal of financial and Quantitative Analysis, 20(4), 461-478.
- Determinants of tender offer premiums, Walkling, R. A., & Edmister, R. O. (1985). Financial Analysts Journal, 41(1), 27-37.
- Seeking competitive bids versus pure passivity in tender offer defense, Gilson, R. J. (1982). Stan. L. Rev., 35, 51.
- Stock repurchase by tender offer: An analysis of the causes of common stock price changes, Masulis, R. W. (1980). The Journal of Finance, 35(2), 305-319.
- Corporate Acquisition by Tender Offer, Fleischer Jr, A., & Mundheim, R. H. (1966). U. Pa. L. Rev., 115, 317.
- How managerial wealth affects the tender offer process, Cotter, J. F., & Zenner, M. (1994). Journal of Financial Economics, 35(1), 63-97.
- Managements' view on share repurchase and tender offer premiums, Wansley, J. W., Lane, W. R., & Sarkar, S. (1989). Financial Management, 18(3), 97.