Tender offers

When an investor or group of investors want to obtain a significant portion of an issuer’s stock, they will most likely extend a tender offer to current shareholders. A hostile takeover of a company is likely to occur in these scenarios.

As we discussed in the review portion of this chapter, investors gain rights when they purchase common stock. Stockholders with large proportionate ownership can accumulate enough stock to “run the show.” Instead of flooding the market with demand to purchase stock (which would significantly drive up the price), large investors typically create tender offers for takeovers.

Tender offers are proposals to purchase stock from current investors. To entice stockholders to voluntarily hand over their shares, investors extending tender offers attempt to purchase shares at a premium to their market price. For example, assume a group of large investors aims to take over ABC company. ABC’s stock trades in the market at $25 per share, while the investors are willing to purchase shares through a tender offer at $30.

Current stockholders ultimately decide if they want their shares to be tendered. In order to tender shares, an investor must be long the stock. If a customer is short shares, they cannot tender their stock. Also, if the investor owns a convertible security, they cannot tender until they’ve submitted conversion instructions.

While we’ve discussed tender offers in terms of common stock, a tender offer can be extended for any security. They can also be performed by the issuer. If an issuer wants to purchase a security of theirs back from the market, they can do so by submitting a tender offer to their investors.

There are a few rules that relate to tender offers. When a tender offer is submitted, investors must be provided at least 20 business days to make their decision. If any aspects of the tender offer change (e.g. the tender price), the offer must be extended by another 10 business days.