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Tender Offer

A proposal submitted by a prospective investor to the shareholders of a publicly traded company

What is a Tender Offer?

A tender offer is a proposal that an investor makes to the shareholders of a publicly traded company. The offer is to tender, or sell, their shares for a specific price at a predetermined time. In some cases, the tender offer may be made by more than one person, such as a group of investors or another business. Tender offers are a commonly used means of acquisition of one company by another.

 

Tender Offer Diagram

 

A tender offer is a conditional offer to buy a large number of shares at a price that is typically higher than the current price of the stock. The basic idea is that the investor or group of individuals making the tender offer are willing to pay the shareholders a premium – a higher than market price – for their shares, but the caveat is that the shareholders must sell a specific number of shares. In most cases, those that extend a tender offer are looking to buy up at least 50% of the company’s shares in order to take control of the company.

 

How a Tender Offer Works

Because the individual(s) looking to buy the stocks are willing to offer the shareholders a significantly higher than market price per share sold, the shareholders have a much greater incentive to sell their shares.

To get a better understanding of how this works, consider this example. An investor approaches the shareholders of Company A whose stock shares are selling for $15 per share. The investor offers the shareholders $25 dollars per share, but the offer may be conditional on the investor being able to acquire more than 50% of Company A’s total shares.

It’s also important to note that tender offers can be made and carried out without the target company’s board of directors giving consent to the shareholders to sell. The individual(s) looking to acquire the shares works with the shareholders to ultimately take control of the company by owning more than 50% of the company’s stocks, which means the acquirer(s) would control. It is enough to effectively take full control of the company. The act of taking control of a company through a tender offer is sometimes referred to as a “hostile takeover.” This is specifically true when the target company’s board of directors opposes the acquirer gaining control of the company.

 

Regulations on Tender Offers

Tender offers are subjected to strict regulation in the United States. The regulations serve as a means of protection for investors and also act as a set of principles that stabilize businesses targeted by those offering tender offers. The rules give the businesses a foundation to stand on so that they can respond to any potential takeover attempts when tender offers are made. There are many regulations for tender offers; however, there are two that stand out as the strictest.

The Williams Act is an amendment to the Securities Exchange Act of 1934. The latter act is, to date, one of the most significant securities laws ever enacted in the U.S. The Williams Act wasn’t added to the Securities Exchange Act until 1968 then New Jersey Senator Harrison A. Williams proposed the amendment.

The Williams Act establishes requirements for any individual, group, or business looking to acquire stocks with the end goal of taking control of the company in question. The act is designed to establish a fair capital market for all participants. It’s also responsible for allowing a company’s board of directors the time they need to determine if the tender offer is beneficial or harmful and to make it easier for them to block the tender offer.

The second standout regulation is Regulation 14E established by the U.S. Securities and Exchange Commission (SEC). This regulation set up rules that must be followed by the individual(s) looking to acquire the bulk of a company’s stock through a tender offer. One such rule makes it illegal for anyone to submit a tender offer if they aren’t entirely sure that they will have the means to seal the deal. It is because doing so would make the price of the stock fluctuate significantly and make it easier for the price to be manipulated in the market. The regulation also covers a number of other issues, including:

  • Additional tender offer practices that are not legal
  • Securities transactions based on materialistic, non-public information when tender offers are on the table
  • Transactions that are prohibited when partial tender offers have been made
  • Prohibition of transactions outside of the tender offer

 

Key Takeaways

Tender offers can be incredibly fruitful for the investor, group, or business seeking to acquire the major portion of a company’s stock. When done without the company’s board of director’s knowledge, tender offers are generally seen as a form of hostile takeover. However, it’s important for companies to pay attention to the rules and regulations that govern tender offers.

They can be tremendously helpful in allowing a company to take the time to determine if the tender offer is a good or bad idea for their businesses. The regulations also help targeted businesses reject the offer if it’s contraindicated for their company.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Definitive Purchase Agreement
  • Creeping Takeover
  • Letter of Intent
  • Revlon Rule

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