Tender Offer is a common term used when talking about takeovers. It is a way to take over a listed company. In this, an existing or prospective investor makes an offer to the shareholders of the target company. The offer is to sell all or some of their shares at a specific price before a particular time. Also, note that the offer is made publicly.
The offer price is typically more than the current stock price. So, we can say those making the offer are willing to pay a premium to the shareholders for their shares.
However, those making the offer usually need to buy a minimum number of shares to get a significant stake in the target company. This condition, however, is in the case of a takeover attempt. The tender offer gets canceled if they fail to acquire the minimum number of shares. Usually, those making the offer look at buying 50% or more of the company’s shares.
A point to note is that the tender offer does not necessarily require the approval of the target company’s board of directors. If the BoD approves, it is good, and if not, the tender offer turns into a “hostile takeover” attempt.
Those making a tender offer could be a hedge fund, an activist investor, private equity firms, an investor group, or more. A public company can itself also make a tender offer to buy back its shares from the open market.
Tender Offer: Purpose
Two primary objectives of a tender offer are
- to help the acquirer get a significant presence or
- to take over the target company.
Another purpose of making such an offer is to make the target company private. If the acquirer has a significant stake in the company, they can influence the other shareholders to sell and then make the company private.
Another purpose could be to merge the target company with an existing company. Or, we can say the acquirer wants to make the target company a subsidiary company.
Often, a tender offer is the first step for a hostile takeover. Or, the acquirer resorts to such an offer if the management does not favor the acquisition. So, we can say that another purpose of this offer is to help acquire a company even if its management does not approve it.
Have a look at Hostile Takeover for a deeper understanding.
Tender Offer – How it Works?
A tender offer starts after investors or the acquirer publicly makes an offer to buy shares from every shareholder at a specific price and within a particular time. As said above, investors offer a price more than the current stock price. By providing a premium on the existing traded value of the stock, it provokes the public shareholders to sell their shares at a premium.
The shareholders, who want to participate or sell their shares, need to submit their application before the deadline. They usually need to inform their brokers of their decision to participate in the offer. If the offer is successful, the shares will be taken from their account, and they will get the money in return.
Lets us take an example to understand how a tender offer works. Assume a group of investors approach shareholders of Company A with a tender offer. The current stock price is $10, while the offer is for $15 per share. However, the proposal has a condition that it will be acceptable only where the shares offered are equivalent or more than 40% of the stake in the company.
One significant advantage is that there is no obligation for the investors making the offer to buy shares unless they get the minimum number of shares. It eliminates the need for upfront cash outlays. Also, it saves investors from liquidating their position if the offer fails.
Moreover, investors also have the option to include clauses, such as the escape clause. It releases them from the liability to buy shares in case the deal fails to get regulatory approval. For instance, if the government rejects the acquisition deal, then the investors can refuse to acquire the shares.
One major disadvantage of the tender offer is that it is costly for the acquirers. The acquiring company needs to pay attorney costs, SEC filing fees, and other fees.
Also, it is time-consuming. Along with giving shareholders time to sell their shares, the depository also takes time to verify the tender shares and make the payment on behalf of the shareholders.
Another disadvantage for the acquirer is if more investors come up with competing bids, the investors have to raise their offer price.
In the U.S., a tender offer has to comply with several rules. These regulations are meant to protect the investors and the targeted company. The laws also support the business so that they can take appropriate actions against the takeover attempt. Two significant regulations for the tender offer are:
It was added to the Securities Exchange Act in 1968 after an amendment was proposed by New Jersey, Senator Harrison A. Williams. The objective of this act is to ensure a fair capital market for all the market participants.
As per the act, any investor, business, or group that wants to acquire the shares to take control of the company needs to share all details. Moreover, anyone who buys over 5% of a company’s outstanding shares must disclose the same to the regulators and the public.
Further, it gives time to the company to decide if the offer is in the interest of the company and its shareholders or not. Moreover, it also helps the company to block the proposal. Further, it also says that the offer must not include false and misleading information.
The SEC (Securities and Exchange Commission) came up with this regulation. It lays down rules that an investor (investors) need to follow if they intend to acquire the bulk of a company’s shares using the tender offer.
One of the Regulation 14E rules declares that any attempt to make an offer is illegal if the acquirer isn’t confident that they have the financial backing to conclude the deal. This rule helps to protect any significant fluctuations in the share price due to the potential deal.
Further, this act makes additional tender offer illegal and prohibits transactions that tender offers do not cover. Moreover, it also covers issues regarding the transaction when partial tender offers are in operation.
The tender offer is one of the best weapons when investors or activist investors need to take control of any company. On the other hand, several protections are available to the target companies, which they use to evaluate and block the offer.
Quiz on Tender Offer
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