What is a 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 takeoverHostile TakeoverA hostile takeover is a type of acquisition of a target company by an acquiring company in which the target company's management is not in favour of the acquisition but the bidder still uses other channels to acquire the company, such as acquiring the company through tender offer by directly making an offer to the public to buy the shares of the target company at a pre-specified price that is higher than the prevailing market prices.read more’ and is true when the Directors of the target company oppose the acquirer gaining control of the firm.
Let us consider an example of a 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 a minimum of 51% of the shares.
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For eg:
Source: Tender Offer (wallstreetmojo.com)
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.
#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 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. 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 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 on what percentage is permitted and what is not. Through this creeping offer, investors or groups 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 offer is generally prohibited as bidders would offer to purchase outstanding shares from certain shareholders while excluding the others.
#7 – Mini-Tender
It 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 an offer is not clear.
#8 – Partial Tender
It 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. It is also referred to as a 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 may be 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 ControlInternal Process ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more
- 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 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.
- 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.
Conclusion
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 time 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 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 directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more, such offers are generally viewed as a form of a hostile takeover. However, it’s essential 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 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 interests of the company.
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