A tender offer is a type of offer made in a takeover that communicates directly to the shareholders, thus bypassing management. This tactic is often used during a hostile takeover, especially if a casual pass or bear hug have proved ineffective. Alternatively, tender offers can be by agreement of the acquirer and target as a way of simplifying the acquisition process.
Payment is most frequently made in cash for a fixed amount but alternative methods may be used. The speed at which a tender offer can be completed is of particular interest to traders and investors. By investing in stock in a company subject to a tender offer, the trader may be able make a quick profit and achieve a very attractive annualized return. The regulatory timeline for HSR clearance is also reduced making the case for investment even stronger. In light of this, merger arbitrage spreads in these stocks will tend to be narrower.
Advantages of a Tender Offer
- One of the biggest advantages of a tender offer is that the acquirer is not obligated to buy shares until a set number are tendered. This has a number of benefits
- It eliminates a large upfront cash outlay
- Prevents investors from liquidating stock positions if offers fail
- Guarantee of a result for the acquirer before action is taken. For example, insufficient shares are tendered results in no payment and the acquirer walks away. Or vice versa, the acquires buys the stock and takes control of the company.
- Acquirers can also benefit by including escape clauses, which release any liability for purchasing target stock. A popular release cause is the failure to achieve regulatory approval and allows the acquirer to exit the deal without penalty.
- The speed at which a tender offer can be completed is also an advantage. Acquirers can gain control of a target in less than a month. The speed in which target shareholders can be paid for their stock also delivers a huge return (depending on the acquisition premium paid) in a short space of time.
- Once an acquirer owns a sufficient quantity of the outstanding target shares, they are able to force the remaining stockholders to sell out and take the company private. This is known as a squeeze out. Alternatively, they can merge the target into an existing business. All of this can eventually be done even if the remaining shareholders did not accept the original tender offer.
Disadvantages of a Tender Offer
If a tender offer is not completed on time as expected at the initial announcement of the deal, it can result in an expensive way to complete a hostile takeover. Ongoing fees for services such as those listed below could indirectly push the price of the target much higher than originally anticipated
- SEC filing fees,
- Legal / attorney costs
- Investment bank advisory fee
- Other fees for specialized services
Should other potential suitors become involved in a hostile takeover, the offer price will increases. Should the original acquirer lose this battle, the ongoing fees listed above may prove to be significant. Should the original acquirer win control, it is likely they would have paid much more for the target.
Shareholders may be undecided whether to tender their shares or may choose to withdraw them after tendering. If the tender is not certain to succeed, investors may hold off tendering in hope of a higher offer. This may cause the deal to be abandoned or delayed.
Further Reading
- Hostile Takeovers – The use of Attack and Defence Strategies by Panagiotis Papadopoulos gives an academic and theoretical analysis of hostile takeovers and defenses paying close attention to how tender offers work
- Predicting Successful Takeovers and Risk Arbitrage, Branch and Yang (2003)
