Tender Offer

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Tender Offer?

A tender offer is a proposal by an investor to all the current shareholders of a publicly 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 to take 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.

Tender Offer

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However, if the tender offer stock becomes expensive or creates an indecisive environment among investors, the tender offer might not be successful, especially when a hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more scenario pans out. It is often confused with Initial Public Offering (IPO). However, when a tender is raised, the company is looking for an outside investor, and both the company and its shareholders’ experience gains.

Tender Offer Explained

A tender offer is an offer to buy some or all of the shares of the shareholders in a company, and usually, the price offered for the shares is at a premium from the market price for a specific period; Thus, it is simply an invitation of bids for the project or acceptance of a formal offer like a takeover bidA Takeover BidThe price offered by the acquiring company to the target company to purchase the company is known as a takeover bid. Such bids are typically placed by larger companies to buy smaller companies in the market and the bids can be in the form of cash, equity, or a combination of both.read more

It can be very fruitful for investors, businesses, or a group seeking to acquire a majority in its stock. If completed without the Board of directors’ knowledge, such offers are generally viewed as a form of a hostile takeover. However, companies need to pay attention to the rules and regulations governing tender offers.

They can be tremendously helpful by giving sufficient time to the firm to determine if the offer is suitable or not for the business. The regulations also help targeted businesses reject the offer if it’s contradicting the company’s interests.

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Tender Offer Explained in Video

Process

Tender offer rules give way to a specific and tedious process. Let us understand the step by step happening in this process through the discussion below.

  1. The bidding company shall form a strategy for expansion by acquiring other companies. Expansion can either be organic (e.g., opening new branches) or inorganic (Mergers & Acquisitions). Many consultants may generate strategies like Management Consultants, Financial Consultants (Accountants & Controllers), Legal consultants, etc.
  2. The bidding firm will request approval from the shareholders.
  3. Necessary finances should be in place for potential future purchases, which can be through the issuance of debt or equityIssuance Of Debt Or EquityDebt refers to the source of money raised from loans on which the interest is required to be paid. Thus it is a form of becoming creditors of lenders, whereas equity means raising money by issuing shares of a company. Shareholders get returns on such shares from the company's profit in the form of dividends.read more (in case of issuing extra equity, a company should first call a Rights issueRights IssueThe term "right issue of shares" refers to the offering of shares to all existing Equity or Preference shareholders of the Company in proportion to their current shareholding in the Company.read more)
  4. An extensive list of targets should be jotted down, and the most prominent targets should be shortlisted.
  5. In the case of a friendly tender offer, due diligence avoids any unforeseen circumstances. These could include:
  6. Examining the financial records of the target company
  7. The firm will state an offer price and appoint Deal makers and Paying agents for executing the tender offers.
  8. Paying agent will prepare the Prospectus/Offer Document in collaboration with Legal Advisors. They will also register with relevant regulatory authorities and ensure a smooth public announcement of the offer.
  9. All associated parties like Broker-Dealers, Custodians, etc., will communicate the information to the beneficial owners of the securities.
  10. Paying Agent shall collate instructions from the shareholders and compute the offer’s success. They shall also officially publish the results. Additionally, they are also responsible for collecting money and tax payment.

Types

From a shareholder’s perspective, such offers are voluntary corporate action as they can trade for a better offer. However, it can be mandatory for a bidder to make an offer for a bidder. Let us understand the types with a better understanding of the tender offer rules.

#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. It is because most stakeholders could use the right to vote at the AGM to their 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 the shares.

#2 – Voluntary

A firm can voluntarily choose to make an offer.

#3 – Friendly Offer

When an offer is made for the outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more of a target company, the Board of Directors is usually informed about the intentions. Then, they can further advise their shareholders on whether to accept or reject the offer. If the Board recommends accepting the offer, it’s called a friendly offer.

#4 – Hostile 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 Offer

In most countries, the rules governing takeover state what percentage is permitted and what is not. Through this creeping offer, investors or groups of individuals adopt a strategy to take advantage of these rules. First, the 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 itself in a hostile takeover before getting any chance to prepare.

#6 – Exclusionary Tender

This offer is generally prohibited as bidders would purchase outstanding shares from certain shareholders while excluding others.

#7 – Mini-Tender

It is an offer to purchase less than 5% of its stock directly from the current investors. The Securities Exchange Act does not regulate such offers, and no requirement is mentioned in the disclosure. However, such tenders often carry high risk since the actual intentions of the entity making an offer are not clear.

#8 – Partial Tender

It is an offer to purchase some but not all of 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 they will purchase back after some time. It is also referred to as a Buy-back offer and can be a tactic to prevent a hostile takeover 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.

Examples

Let us understand the concept better with the help of a couple of examples through the discussion of the tender offer rules.

Example #1

ABC Ltd is a publicly listed company whose share price is trading at $15 per share. Michael is a venture capitalist who wants to take over the company and offers $18 per share provided his firm secures at least 51% of ABC Ltd.

The shareholders of this tender offer stock sell the stock for a premium and experience gains above the market value. Michael and his firm successfully take over the management of ABC Ltd.

Example #2

Rovio Entertainment, a Finnish game studio commenced discussions of a potential tender offer that will acquire their entire share capital.

Indicative non-binding proposals from across the country and the world began coming in. Among these offers was an offer from Playtika Holdings from Israel who offered roughly 750 million euros. This offer presents itself with a 60 percent premium on the share price.

Tender Offer vs Merger

Businesses have to always be on their toes to run a successful show for decades. However, a few challenges cannot be met through internal sources. A few of the external sources are mergers, conversions or tender offer stocks.

Despite the fact that both tenders and mergers are confused for one another, there are quite a few differences in their fundamentals. Let us understand them through the discussion below.

BasisTender OfferMerger
EntityA new business entity and its name is not required as only the shift in stakeholders takes place.A new business name and registration might be required.
CircumstancesA tender offer might be in action in friendly or hostile conditions.Mergers are usually carried out in friendly circumstances where both businesses can gain from the collaboration.
PurposeUsually, these offers are aimed at booking profits from the premium of sale.To eliminate competition, widen the range of products or services.
OwnershipA majority of the shareholders change. However, the ownership remains intact.The ownership changes for a company going through a merger.

This article has been a guide to what is a Tender Offer. Here we explain it with examples to know how it works, its process, and vs merger. You can learn more about M&A from the following articles –

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