Tender offers & buybacks

Tender offers are utilized when an investor, group of investors, or an organization aims to obtain a significant portion of an issuer’s stock. Outside investors (those not connected to the issuer in any way) sometimes create tender offers to attempt a hostile takeover. As discussed earlier in this unit, common stock investors maintain voting rights. Investors with sizeable ownership levels can accumulate enough stock to “run the show” or force specific corporate actions.

For a hostile takeover to occur, more shares must be purchased by the “takeover” party. They could buy more shares from the market, which would flood the market with demand. The added demand would significantly drive up the stock price, making the acquisition more expensive. Most hostile takeovers utilize tender offers to avoid this problem.

Tender offers are direct proposals to purchase stock from current investors, typically at premium prices. To obtain more shares in HP in early 2020, Xerox offered HP investors $18.40 in cash and 0.149 shares of Xerox stock for every HP share tendered. At the time, this represented roughly $24 of value per HP share, while HP stock only traded around $17 per share. The $7 premium was Xerox tempting HP shareholders to sell their shares.

Current stockholders ultimately decide whether to tender their shares or reject the offer. To be eligible to tender, an investor must be long the stock. Investors with short positions cannot tender their stock. Also, investors with convertible securities can only tender once they’ve submitted irrevocable conversion instructions (e.g., HP convertible bondholder converts the security to HP common stock).

There are a few regulations related to tender offers. 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.

While we’ve discussed tender offers for common stock, they can be extended for any security. Additionally, an issuer may perform tender offers for its own securities. For example, General Electric Company (ticker: GE) issued a tender offer for $5 billion of its outstanding debt in 2019.

Issuers may also purchase their securities from the open market. When this action occurs with stock, it’s referred to as a stock buyback. Issuers typically repurchase their shares to benefit their stockholders. With fewer outstanding shares, the issuer will report higher earnings per share (EPS) on their financial reports even if the company’s revenues stay flat. For example, let’s assume the following:

ABC Company

• Outstanding shares: 1,000,000
• 2022 annual earnings: $5,000,000

Let’s establish the formula for earnings per share:

$\text{EPS}=\frac{\text{Annual earnings}}{\text{Outstanding\hspace{0.33em}shares}}$

$\text{EPS}=\frac{\text{\$5,000,000}}{\text{1,000,000}}$

$\text{EPS}=\text{\$5.00}$

Now, let’s assume ABC Company repurchases 200,000 shares in 2023, but reports the same annual earnings of $5 million. What’s the new EPS?

$\text{EPS}=\frac{\text{\$5,000,000}}{\text{800,000}}$

$\text{EPS}=\text{\$6.25}$

EPS is a figure many investors and analysts pay close attention to. Buybacks result in some EPS manipulation, but it costs money to perform stock buybacks. If the issuer can make up the money spent on the buybacks from their business revenue, their EPS will rise. Stock buybacks became a big focus on the political stage in 2020 because many issuers performing these buybacks needed financial support from the government during the COVID-19 crisis.