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What Is a Tender Offer?

There are numerous approaches you can take when investing in the stock market. While some shareholders prefer to cash out when prices rise, other investors are more interested in gaining control of a corporation. A scenario that satisfies both parties is a tender offer. So, what is a tender offer, and does it really offer the best of both worlds?

Tender offer definition

A tender offer is a bid or proposal made to company shareholders. An investor, or group of investors, offers to buy all the shareholders’ stock under specific conditions. The tender offer is usually above market value for the publicly held company, giving shareholders a chance to cash out with premium returns within a limited time frame. The shareholders must agree to sell a specified minimum amount of their shares at the agreed-upon price, or the tender offer is rescinded.

This type of proposition is often used during acquisitions, giving a business the chance to buy out most of the other business’s stock. By purchasing a minimum of 50% of the company’s shares, the purchaser can take control. 

The tender offer definition above refers to publicly traded companies, but this practice can also apply to privately held companies. In this second type of tender offer, the company backs the shares, allowing sellers to tender the shares back to the company or a third-party investor. This gives a structured opportunity for sellers to tap into their equity without waiting for an acquisition.

The names for these different types of tender offers are:

  • Issuer tender offers: The company purchases shares back from its shareholders.

  • Third-party tender offers: A separate investor or business purchases the shares at a specified price and time.

How do tender offers work?

To set the tender offer process in motion, a buyer first approaches the shareholders with a conditional offer. They ask for a minimum number of shares at a set price. If this minimum can’t be met, then the offer is pulled. It’s common to offer a price above market value to appeal to shareholders and entice them to sell.

If the sellers agree to the offer price, they prepare the transaction documents and any necessary disclosures.

There are some tender offer rules to be aware of. The US Securities and Exchange Commission (SEC) regulates tender offers. One of the rules is that offers must remain open for a minimum of 20 business days, giving sellers ample time to research their options and look over the transaction documents.

Additional tender offer rules may vary by company, but typically include things like a limit to the number of shares that can be sold. Some companies also require shareholders to hold the stock for a minimum of six months before selling.

Should you sell tender shares?

If your company or a third-party investor approaches you about purchasing tender shares, should you take them up on the offer? It depends. There are certain benefits for shareholders, including the potential for selling shares above their market value. Selling also increases your liquidity by giving you access to cash which could be reinvested.

Yet at the same time, not all tender offers will be beneficial for the seller. If the company is on a steady growth trajectory, it’s possible that the shares will increase in value later. You might miss out on this growth even by selling at an offer over today’s market value.

Before agreeing to any transaction, you should first attend any information sessions and carefully read over the transaction documents. Find out if you qualify under the company rules, and whether selling makes sense considering your personal investment position.

Should you purchase tender shares?

From an investor’s perspective, there are also pros and cons to tender offers. For example, you’re not obligated to buy the shares until the minimum number is met, which helps prevent you from losing out on a large amount of upfront cash. You can also gain control of your target company swiftly with this type of practice, making acquisitions easier.

Yet on the other hand, it’s important to be aware of all SEC regulations, filing fees, and market fluctuations. Try to avoid offering a price that’s too far above the market rate for shares, or you could end up losing money in the process of your acquisition. As with any investment activity, tender offers require both risk and research.

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