A hedged tender is a strategy whereby a shareholder sells short a portion of their shares to hedge against a price drop in anticipation that not all of their tendered shares will be accepted.
A hedged tender is a strategy that shareholders of a takeover target can adopt to manage risk.
In a hedged tender, shareholders tender all of their shares and short the remaining pro-rata portion to lock in the appreciated market price. Once the tender is accepted, the shareholder returns the shares to the short sell counterparty.
The hedged tender strategy protects the shareholder from the inevitable drop in share value if the tender offer falls through.
Understanding Hedged Tenders
To understand hedged tenders, it is helpful to dive into their components:
A tender offer refers to a public takeover bid whereby one company (acquiring company) makes a bid to acquire another company (target company). The acquirer makes a tender offer to buy shares within a specified timeframe and above the market price to convince the target company’s shareholders to sell.
After a tender offer is made, the process whereby shareholders submit their shares to be bought for the takeover is called a tender.
Pro-rata (or in proportion in Latin) refers to the allocation of equal proportions. For example, if an acquiring company makes a bid of 50% shares pro-rata, they will only buy up to 50% of the shares the shareholder bids. If the shareholder offers 2,000, they may accept 1,000, and if they offer 1,000, they may accept 500, etc.
Short selling is a strategy whereby an investor borrows and sells a security that does not belong to them and then returns it later. In the case of a hedged tender, the shareholder short sells the balance of shares that would not be acquired through the tender to effectively mimic the selling of all of their holdings.
Hedging refers to any risk management strategy – in this case, to protect against a fall in share value.
When an acquiring company makes a tender offer, shareholders of the target company can adopt the hedged tender strategy to manage their risk. The shareholder submits a tender, and if they think not all of their tendered shares will be accepted, they can short sell the remaining portion. In such a way, the shareholder can lock in the price for all of their shares if the tender offer is completed.
Hedged Tender Example
An acquiring company puts forward a tender offer of 50% of the target company’s shares, at $50 a share when the market price is $35. If a shareholder of the target company anticipates that only 50% of their submitted shares will be accepted, they will tender all their shares and short sell another 50%.
The news of the public takeover will appreciate share prices close to the bid of $50, so the shareholder will short sell the shares on the market, locking in the sale price for 50% of their holdings. When the tender gets accepted, the acquiring company buys 50% of the shareholder’s shares. With the untendered 50%, the shareholder can return these shares to the short sell counterparty.
Using the hedged tender strategy, the shareholder will have sold all their shares for close to $50. If the tender is rejected, the shareholder will have sold 50% of the shares close to $50. However, if the shareholder had not used the hedged tender strategy and the tender offer was not accepted, all 100% of shares would likely drop in value.
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