Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
- Vertical Merger
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
- Hostile Takeover
- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
- Investment Banking Basics (44+)
- Investment Banking Careers (25+)
- Investment Banking Firms (27+)
- Top Banks (42+)
- Cryptocurrency Basics (10+)
What is Tender Offer?
A tender offer is a proposal by an investor to all the current shareholders of a public traded firm to purchase or part of their shares for sale at a certain price and time. Such offers can be executed without the permission of the firm’s Board of Directors and the acquirer can coordinate with the shareholders for taking over the firm. It can also be referred to as a ‘hostile takeover’ and is true when the Directors of the target company oppose the acquirer gaining control of the firm.
Let us consider an example for clear understanding. The current stock price of ABC Ltd is trading at $15 per share and someone wishing to take over the firm may issue a tender offer for $18 per share on the condition that they can acquire minimum 51% of the shares.
Top 10 Types of Tender Offers
From a shareholder’s perspective, such offers are voluntary corporate action as they can trade due to a better offer. However, for a bidder, it can be mandatory to make an offer.
Below are some of the top 10 types of tender offer:
#1 – Mandatory
Mandatory is an offer in which the entity making the offer has to make it for the rest of the shares of the target company. This is because a majority stakeholder could use the right to vote at the AGM to their own advantage at the expense of the shareholder. Thus, if the entity making the offer has already reached a certain stake in the target company and has gone over certain thresholds it has to make an offer for the remainder of shares.
#2 – Voluntary
A firm can voluntarily choose to make a tender offer.
#3 – Friendly Tender Offer
When an offer is made for the outstanding shares of a target company, the Board of Directors is usually informed about the intentions. They can further advise their shareholders on whether to accept or reject the offer. In case the board recommends accepting the offer, it’s called as a friendly offer.
#4 – Hostile Tender Offer
If the person/entity making the offer does not inform the Board of the target company of the respective bid or if the board thinks the offer price is too low and the person/entity making the offer continues to publicize the bid, the offer is hostile.
#5 – Creeping Tender Offer
In most of the countries, the rules governing takeover state on what percentage is permitted and what is not. Through this creeping offer, investors or group of individuals adopt a strategy to take advantage around these rules. The group of individuals will gradually acquire target company shares in the open market.
The ultimate goal of such an offer is to acquire sufficient shares of the stock to have enough interest in the company for creating a voting bloc at the AGM of the target company. It’s a sly tactic through which the offer attempt to circumvent the legal requirements and quietly purchase shares in small portions from various other shareholders. Once a substantial number of shares have been acquired with the group, the process of filing the documents with the SEC is undertaken resulting in the target company finding themselves in a hostile takeover before getting any chance to prepare.
#6 – Exclusionary Tender
This kind of offer is generally prohibited as bidders would offer to purchase outstanding shares from certain shareholders while excluding the others.
#7 – Mini-Tender
This is an offer to purchase less than 5% of the company’s stock directly from the current investors. Such offers are not regulated by the Securities Exchange Act and no requirement is mentioned in the disclosure. Such tenders often carry high risk since the actual intentions of the entity making offer is not clear.
#8 – Partial Tender Offer
This is an offer to purchase some but not all the shares of the company.
#9 – Self-Tender
It’s an offer by the firm to its shareholders to buy some or all the shares which they will purchase it back after some time. This is also referred to as Buy-back offer and can be a tactic to prevent a hostile take-over or make it more difficult.
#10 – Two Tier
Initially, the acquiring company will make a tender offer for obtaining voting control of the target company and in the second stage, the rest of the shares will be purchased.
Process of Tender Offers
- The bidding company shall form a strategy about expansion through acquiring other companies. Expansion can either be organic (e.g. opening new branches) or inorganic (Mergers & Acquisition). Many consultants maybe involved in generating strategies like Management Consultants, Financial Consultants (Accountants & Controllers), Legal consultants etc.
- The bidding firm will request approval from the shareholders.
- Necessary finances should be in place for potential future purchases which can be through the issuance of debt or equity (in case of issuing extra equity, a company should first call a Rights issue)
- An extensive list of targets should be jotted down and the most prominent targets should be shortlisted.
- In case of a friendly tender offer, due diligence to avoid any unforeseen circumstances. These could include:
- Examining the financial records of the target company
- Internal Process Control
- Budgets, Planning & Analysis
- Contracts with Vendors, Suppliers and other stakeholders
- Examining the insurance policies
- The firm will state an offer price and appoint Deal makers and Paying agents for executing the tender offers.
- Paying agent will prepare Prospectus/Offer Document in collaboration with Legal Advisors. They will also register with relevant regulatory authorities and ensure smooth public announcement of the offer.
- All associated parties like Broker-Dealers, Custodians etc will communicate the information to the beneficial owners of the securities.
- Paying Agent shall collate instructions from the shareholders and compute the success of the offer. They shall also officially publish the results. Additionally, they are also responsible for the collection of money and tax payment.
Tender offers can be very fruitful for the investors, business or a group seeking to acquire a majority in the company’s stock. If completed without the knowledge of the board of directors, such offers are generally viewed as a form of hostile takeover. However, it’s important for companies to pay attention to the rules and regulations governing tender offers.
They can be tremendously helpful by giving sufficient time to the firm for determining if the offer is suitable or not for the business. The regulations also help targeted businesses reject the offer if it’s contradicting the interests of the company.
Tender Offer Video
This has been a guide to what is Tender Offer? Here we discuss the tender offer definition, Top 10 types of tender offers, and also the process of a tender offer. You can learn more about M&A from the following articles –