When an investor (or group of investors) wants to acquire a significant portion of an issuer’s stock, they’ll often use a tender offer to buy shares directly from current shareholders. These situations can lead to a hostile takeover.
As discussed in the review portion of this chapter, investors gain rights when they purchase common stock. Stockholders with large proportionate ownership can accumulate enough shares to influence (or control) company decisions. Rather than placing large buy orders in the open market - which would likely push the stock price up - large investors typically use tender offers when attempting a takeover.
Tender offers are proposals to purchase stock from current investors. To encourage stockholders to voluntarily sell their shares, the party making the tender offer usually offers a price above the current market price (a premium). For example, suppose a group of large investors wants to take over ABC Company. ABC’s stock is trading at $25 per share, and the investors offer to buy shares through a tender offer at $30 per share.
Each stockholder decides whether to have their shares tendered (submitted into the offer). To tender shares, an investor must be long the stock. If a customer is short shares, they can’t tender stock they don’t own. Also, if an investor owns a convertible security, they can’t tender it until they’ve submitted conversion instructions.
Although we often discuss tender offers in the context of common stock, a tender offer can be made for any security. A tender offer can also be made by the issuer. For example, if an issuer wants to buy back its own securities from the market, it can do so by making a tender offer to investors.
There are a few key timing rules for tender offers:
Sign up for free to take 5 quiz questions on this topic