Tender Offers & the Effect on Investors

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Tender Offer

So what is a tender offer?

A tender offer is a public offer, made by a person, business, or group, to acquire a given amount of a particular security. The term is derived from inviting existing stockholders to “tender”, or sell, their shares. In effect, a tender offer is a conditional offer to buy. The question is posed by the individual or entity making the offer, “I am willing to buy your stock at $[x] if you tender (sell) it to me but only if a total of [y] shares are tendered to me by all stockholders.”

Usually, tender offers are proposed so that the acquirer can accumulate enough common stock to either get a significant presence on or completely take over the board of directors.  A tender offer occurs as the acquirer owns a large percentage of the outstanding stock. Therein, he or she can force all remaining stockholders to sell out and take the company private or merge into an existing publicly traded business.

A tender offer is mainly used in cases where the management and board of directors does not believe the takeover would be in the best interest of the shareholder. As a result, the management team will oppose as they consider it incompatible with their fiduciary duty. This is also a means by which a hostile takeover can be accomplished by acquirers and/or investors who would like to take control over the objection and fight of incumbent directors and executives.

Tender offers are by far more common in the stock market than a so-called proxy war. A proxy war is another example of an attempt to take control of a business. A company’s annual proxy statement breaks out important information including matters on which stockholders must vote. In a proxy war, the individual, business, or group who wants to take over management tries to convince stockholders to vote for their slate of directors, effectively removing old directors and seizing control of the business.

Proxy takeovers are usually executed by corporate raiders, these corporate raiders will strip the company of its valuable assets and sell these assets piece-by-piece. In other instances, proxy takeovers are executed by well-meaning investors with the best interest of the company in mind.  The investors will despite of mismanagement, argue with a slew of documentations citing delinquencies on the part of directors and the negative impact it has on shareholders. This battle is usually resolved via voting and oftentimes shares will be then managed and/or sold to the investor with  the most compelling argument with documented proof.

 

How Tender Offers Work on Your End, as an Investor

Imagine you own 1,000 shares of Company ABC at $50 per share for a market valuation of $50,000. One day, you wake up, and your financial advisor says that Firm XYZ has made a formal tender offer to buy your shares at $65 per share but that the deal will only close if, say, 80 percent of the outstanding stock is tendered to the acquirer by stockholders as part of the transaction. You have a couple of weeks to decide whether or not you will tender your shares.

If you decide to accept your tender offer, you must submit your instructions before the deadline or else you will not be eligible to participate. It’s usually as simple as telling your broker, “Sure, I’ll sell out at $65 per share” and waiting to see what happens. (Of course, if you have physical stock certificates, it’s an entirely different procedure, but those are relatively rare these days.)

If the tender offer is successful and enough shares are tendered, the transaction is completed. You will see the 1,000 shares of Company ABC taken out of your account and a deposit of $65,000 cash placed in. If the tender offer fails because fewer than 80 percent of the shares were tendered to the would-be acquirer, the offer disappears. You are then left with your original 1,000 shares of Company ABC in your brokerage account.

If you reject the tender offer or miss the deadline, you will get nothing. You will have the original 1,000 shares of Company ABC and can sell to other investors in the broader stock market at the first available price. In some cases, persons from the initial tender offer will return for a secondary tender offer. This occurs in the event of not receiving enough shares or wanting to acquire additional ownership in which case you might have another bite at the apple.

Something to always note, if you don’t tender but enough people do, you’re probably going to be forced out of your ownership, as the enterprise may be taken private down the road.

 

If you want to start investing with SSL but don’t have the time to monitor the market or to conduct the trades yourself then you can choose one of SSL’s managed Financial Planning products. We offer a variety of products for every type of investor and if you are interested in managing online trades yourself and having complete control over your investment portfolio then you can try SSL’s Brokerage account.

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