Buffett said that when you give a man a fish, you feed him for a day, but when you teach him to arbitrage, you feed him for life. Now, I don’t know if that’s true of fish, but it’s definitely true of stock tender offers.
Stock tender offers are one of those unique areas of the market that can offer investors with numerous quick wins, if executed well. And, unlike classic risk arb, there seems to be a lot less risk involved.
So, what exactly are stock tender offers, and how can you collect a steady stream of cash to fund your high-flying lifestyle?
Well, dear investor, this is exactly what I want to walk you through today.
Table of Contents
Stock Tender Offers: Why Companies Chase Your Shares
When we talk about tender offers, we’re focusing on arbitrage opportunities for investors. But, unlike your typical risk arbitrage opportunities, tenders have their own unique aspects that investors have to be aware of to profit.
What is a tender offer?
A tender offer is a public proposal by a company or individual to buy a specific number of shares from shareholders of a target company at a specified price, usually at a premium over the current market price, within a set timeframe.
It’s often used to acquire a significant stake or full control of the company, bypassing its management or board. Shareholders decide individually whether to sell their shares.
Tender offers are regulated to ensure transparency and fairness, like under the Williams Act in the U.S., and can be friendly (with target company approval) or hostile (without it). They’re common in mergers and acquisitions or when an investor seeks influence over a company.
What is the reason for tender offers?
The short answer is that the entity making the tender offer thinks that it can make money by acquiring shares, but that liquidity is not adequate in the market to buy the number of shares that the entity desires.
Let’s unpack this a bit.
A tender offer is typically made for the following reasons:
- Acquisition of Control: The bidder aims to gain a controlling stake in the target company, either to influence its operations or fully acquire it, often as part of a merger or acquisition strategy.
- Increase Ownership Stake: An existing shareholder or investor may use a tender offer to increase their ownership percentage, strengthening their influence over the company’s decisions without needing board approval.
- Takeover (Friendly or Hostile): In a friendly takeover, the offer is made with the target company’s management approval to merge or combine operations. In a hostile takeover, the bidder goes directly to shareholders to bypass resistant management or the board.
- Delisting or Going Private: A tender offer can be used to buy enough shares to take a public company private, reducing regulatory requirements and public scrutiny, often initiated by management or a private equity firm.
- Strategic Investment: The bidder may seek to acquire a significant but non-controlling stake to gain strategic benefits, like access to the target’s technology, market share, or assets.
- Shareholder Exit Opportunity: It provides shareholders a chance to sell their shares at a premium over the market price, especially in cases where the stock is undervalued or illiquid.
The specific reason depends on the bidder’s goals, such as expanding market presence, consolidating industries, or restructuring the target company for profit.
Is a tender offer a hostile takeover?
A tender offer is not necessarily a hostile takeover, but it can be used as a strategy in one. A tender offer is simply a public offer to buy shares from a company's shareholders at a specified price, often at a premium, within a set timeframe. Whether it’s hostile depends on the context:
- Friendly Tender Offer: If the target company’s management and board approve the offer, it’s considered friendly. This often happens in negotiated mergers or acquisitions where both sides agree on the terms.
- Hostile Tender Offer: If the bidder makes the offer directly to shareholders without the approval of the target company’s management or board, it’s hostile. This typically occurs when the target’s leadership opposes the takeover, and the bidder seeks to bypass them by appealing directly to shareholders.
In short, a tender offer is a tool that can be used in either a friendly or hostile takeover, depending on whether the target company’s management supports or opposes it.
Is it a good idea to accept a tender offer? How can you tell?
Deciding whether to accept a tender offer depends on several factors, and there’s no one-size-fits-all answer. Leaving aside your personal financial situation, a lot still depends on the prospects of the company being bid on, the return you’ll see if you tender, and the tax implications you’ll face.
Reasons to Accept a Tender Offer
- Premium Over Market Price: Tender offers often propose a price higher than the current market value of the shares, providing an opportunity to sell at a profit.
- Liquidity Opportunity: If the stock is illiquid or the market for it is volatile, the tender offer provides a clear exit strategy with immediate cash.
- Uncertainty About Future Performance: If you’re concerned about the company’s future (e.g., poor financials, market challenges, or management issues), accepting the offer can lock in value before potential declines.
- Attractive Terms: The offer may include favorable terms, like cash payments or a mix of cash and stock, that align with your financial goals.
- Risk of Post-Offer Decline: If you believe the stock price might drop after the offer expires (e.g., if the bidder withdraws or the company faces challenges), accepting could be prudent.
- Odd-Lot Preference: Some stock tenders specify a preference to acquire odd lot shares, holdings of fewer than 100 shares. An open market purchase and immediate tender can provide a quick (though small) profit.
Reasons to Reject a Tender Offer
- Undervaluation: The offer price may be below the stock’s intrinsic or future value, especially if you believe the company has strong long-term growth potential.
- Better Future Prospects: If the company is likely to perform better independently or attract a higher offer later, holding onto shares might yield greater returns.
- Strategic Concerns: In a hostile takeover, the bidder’s plans (e.g., restructuring, asset sales) might not align with shareholder interests, or you may prefer the current management’s strategy.
- Tax Implications: Selling shares could trigger capital gains taxes, which might outweigh the immediate benefit of the offer, depending on your tax situation.
- Partial Offer Risk: If the tender offer is for a limited number of shares, accepting might leave you with fewer shares in a potentially less liquid or devalued company post-offer.
- Over-subscription likelihood: Sometimes, an offeror will aim to buy a large block, but not all the shares in a company. If more shares are tendered than the buyer wants to buy, they won’t purchase all the shares you tendered.
Key Tender Offer Factors to Evaluate
- Offer Price vs. Fair Value: Compare the offer price to the stock’s current market price, historical trends, and analyst estimates of fair value. Consider getting a professional valuation if possible.
- Company’s Fundamentals: Review the target company’s financial health, growth prospects, and competitive position. Is the company undervalued, or is the premium justified?
- Bidder’s Intentions: Research the bidder’s plans (e.g., merger, privatization, or restructuring) and how they might affect the company’s value or operations.
- Market Conditions: Consider broader market trends or industry dynamics that could impact the stock’s future value.
- Your Financial Goals: Assess whether the cash from accepting the offer aligns with your investment strategy, risk tolerance, and need for liquidity.
- Regulatory or Legal Risks: Ensure the offer complies with regulations (e.g., SEC rules in the U.S.) and check for any legal challenges or conditions that might affect its completion.
The key consideration as to whether you should accept or reject a stock tender offer, in my opinion, comes down to opportunity cost. In all cases of selling shares for economic reasons (as opposed to paying for your new Mercedes) comes down to what else you can do with your money. You always have to weigh one opportunity against another. If there’s a better use for your after tax funds, given the price you can get for your shares, then it may be worth tendering.
What happens if I refuse a tender offer?
If you refuse a tender offer, you retain your shares in the company, and the outcome depends on the specific circumstances surrounding the offer and the company's future.
1. You Keep Your Shares
- By not tendering your shares, you continue to hold your existing ownership in the company, maintaining your position as a shareholder with all associated rights (e.g., voting, dividends, if applicable).
- Your shares remain subject to market conditions, and their value may rise or fall based on the company’s performance, market trends, or the outcome of the tender offer.
2. Possible Outcomes After Refusing
Overall, the consequences depend on the tender offer’s success, the bidder’s intentions, and the company’s situation:
- Tender Offer Succeeds (Bidder Acquires Significant Shares):
- Change in Control: If the bidder gains a controlling stake (e.g., over 50%), they may influence the company’s board, management, or strategy, which could affect the stock’s value positively or negatively.
- Reduced Liquidity: If many shareholders tender their shares, the stock may become less liquid, making it harder to sell your shares later at a desirable price.
- Potential Squeeze-Out: If the bidder acquires a high percentage of shares (e.g., 90% or more in some jurisdictions), they might initiate a “squeeze-out,” forcing remaining shareholders to sell at the offer price or a similar value, depending on local regulations.
- Stock Price Movement: The stock price may drop after the offer expires, especially if the offer was at a premium, as the market adjusts to the absence of the bidder’s support. Alternatively, it could rise if the company’s prospects improve or another bidder emerges.
- Tender Offer Fails (Bidder Doesn’t Meet Goals):
- Status Quo: If the bidder doesn’t acquire enough shares, the company’s management and strategy remain unchanged, and your shares continue to reflect the company’s ongoing performance.
- Stock Price Volatility: The stock price may decline if the market expected the premium from the offer, or it could rise if investors believe the company is better off independent.
- Future Offers: Another tender offer at a higher or lower price could emerge, giving you another chance to sell.
- Company Goes Private: If the tender offer is part of a plan to take the company private and it succeeds, you might face a squeeze-out or be left with shares in a non-publicly traded company, which are harder to sell and may have limited value.
- Hostile Takeover Context: In a hostile tender offer, if you refuse and the bidder fails, the current management stays in control, which could be positive if you support their strategy. If the bidder succeeds, you might face changes you disagree with, like asset sales or restructuring.
3. Potential Risks of Refusing
- Missed Premium: You forgo the opportunity to sell at the offered premium, which may be higher than the current or future market price.
- Stock Price Decline: If the market perceives the tender offer’s failure as negative or the company struggles, your shares could lose value.
- Lower Liquidity: With fewer shareholders, trading volume may decrease, making it harder to sell your shares later.
- Tax Considerations: While refusing avoids immediate capital gains taxes, future sales could face different tax implications depending on price and timing.
4. Potential Benefits of Refusing
- Higher Future Value: If you believe the company is undervalued or has strong growth potential, holding shares could lead to greater long-term returns.
- Better Offers: In competitive situations, another bidder might emerge with a higher offer.
- Alignment with Strategy: If you support the current management or disagree with the bidder’s plans, retaining shares keeps you aligned with the company’s direction.
What are the disadvantages of a tender offer?
A tender offer’s disadvantages vary for shareholders, the target company, and the bidder. For shareholders, the primary drawback is the risk of selling shares at a price below the company’s true or future value, especially if the offer exploits a temporarily low stock price. The limited timeframe — often 20 business days in the U.S. — pressures quick decisions, potentially without full information on the company’s prospects or the bidder’s plans.
Refusing the offer may lead to a stock price drop if the offer fails or was driving a premium, or reduced liquidity if many shareholders sell, making future sales harder. Accepting can trigger capital gains taxes, reducing net proceeds, and in hostile takeovers, the bidder’s plans (e.g., asset sales) may harm long-term value. If the bidder acquires most shares, a squeeze-out could force remaining shareholders to sell at less favorable terms.
For the target company, a tender offer disrupts operations, as management diverts focus to defense strategies, incurring high legal and advisory costs. Hostile offers can lead to loss of control, with new owners altering strategy or replacing leadership, potentially damaging culture or morale. Employees may face uncertainty, leading to turnover.
Bidders face financial strain from paying a premium and covering transaction costs, with no guarantee of success if shareholders don’t tender enough shares. Regulatory hurdles, like SEC compliance, add complexity, and integration challenges post-acquisition can erode expected benefits if synergies don’t materialize.
Shareholders should research the offer, company financials, and bidder intentions, monitor for competing bids, and consider partial tendering to balance risks. Consulting a financial advisor helps align decisions with goals. Disadvantages include missed opportunities, tax hits, and uncertainty, so careful evaluation is key.
Stock Tender Offer Example: Real-World Moves That Made Headlines
If you’re going to participate in tender offers, then you’ll need some practical examples of how investors profited from previous offers. I lay those out for you below.
What is an example of a tender offer? How did investors profit?
A notable example is Elon Musk’s 2022 tender offer for Twitter (now X Corp). Musk offered to buy all outstanding shares at $44 per share, a 38% premium over the stock’s closing price of $31.85 on April 1, 2022, before his stake was disclosed. The total deal was valued at $44 billion. Twitter’s board initially resisted but accepted after negotiations, and the offer closed in October 2022.
Shareholders who tendered their shares received $44 per share in cash, significantly above the market price before the offer was announced. For example, an investor holding 1,000 shares at $31.85 would have had a market value of $31,850. By accepting the offer, they received $44,000, netting a profit of $12,150 (before taxes). This premium rewarded investors, especially those who bought shares at lower prices earlier. The stock price surged after Musk’s offer, trading near the offer price as the deal’s certainty grew, reducing risk for tendering shareholders. However, those who held shares expecting a higher bid missed out when Twitter went private, ending public trading.
Accepting triggered capital gains taxes, potentially reducing profits. Shareholders who declined faced illiquidity, as private company shares are harder to sell. The deal’s success also raised concerns about Twitter’s future direction under new ownership, which could impact long-term value if shares remained publicly traded. Investors had to weigh the immediate premium against potential future growth.
Overall, Musk’s offer provided a lucrative exit for many, with profits tied to the premium and their original purchase price.
Public/Private Company Tender Offer Rules: Navigating the Playbook
Investors really need to be up to speed on some of the key rules behind tender offers to navigate them well. These rules are laid out in securities law, and each country has its own unique quirks and peculiarities.
Below, I’ll focus on answering some frequently asked questions for stock tender offer rules in the US.
What are the requirements for a tender offer?
A tender offer, a public bid to buy shares of a company, must comply with strict regulatory requirements, particularly in the U.S. under the Securities Exchange Act of 1934 and the Williams Act. Key requirements include:
- Disclosure: The bidder must file a Schedule TO with the SEC, detailing the offer’s terms, price, number of shares sought, financing sources, and intentions for the company (e.g., merger, control). This ensures transparency for shareholders.
- Minimum Duration: The offer must remain open for at least 20 business days, giving shareholders time to evaluate and decide whether to tender their shares.
- Fair Treatment: All shareholders must be offered the same price and terms. If the offer price increases, those who tendered earlier receive the higher price (best-price rule).
- Shareholder Protections: Shareholders can withdraw tendered shares during the offer period. The bidder must promptly pay for or return shares after the offer closes.
- Regulatory Review: The offer must comply with antitrust laws (e.g., Hart-Scott-Rodino Act) and other regulations, especially for large acquisitions, to prevent monopolies.
- Public Announcement: The bidder must publicly disclose the offer, often through press releases or filings, to inform all shareholders.
Non-compliance can lead to legal challenges or SEC penalties. State laws or international regulations may also apply, depending on the company’s jurisdiction.
Can a private company make a public offer?
A private company can make a tender offer to buy shares of a public company, aiming for control or privatization. It must comply with SEC rules, including filing a Schedule TO, ensuring equal pricing, and a 20-day minimum offer period. Financing and regulatory hurdles are key challenges.
What is the 20 day rule for tender offers?
The 20-day rule for a tender offer, mandated by the SEC under the Williams Act, requires the offer to remain open for at least 20 business days. This gives shareholders sufficient time to evaluate the terms, price, and bidder’s intentions before deciding whether to tender their shares.
Does rule 13e-4 apply to private companies?
Rule 13e-4 of the Securities Exchange Act applies to private companies only if they are issuers with registered securities making a tender offer for their own shares. It regulates issuer tender offers, requiring disclosures, equal treatment, and a 20-day minimum offer period to protect shareholders.
What is the difference between a public offer and a private offer?
A public tender offer targets all shareholders of a publicly traded company, regulated by the SEC, with disclosures and a 20-day minimum period. A private offer is a non-public negotiation to buy shares from specific shareholders, unregulated by the SEC, often involving fewer shares and less transparency.
What happens if a tender offer fails?
If a tender offer fails, typically because not enough shareholders tender their shares to meet the bidder’s minimum threshold, several outcomes follow. The bidder does not acquire the desired shares, and the offer is withdrawn. Shareholders who tendered their shares have them returned without payment. The target company’s stock price often drops, as the market may have priced in the premium offered, especially if the offer was at a significant markup. The company continues under existing management, maintaining its current strategy, which can stabilize or harm value depending on its prospects. Shareholders who refused the offer retain their shares, facing potential volatility or reduced liquidity if market sentiment sours. The bidder incurs costs (e.g., legal, advisory fees) without gaining control, possibly impacting their reputation or finances. A failed offer may also attract competing bids or prompt strategic changes by the target’s management to boost shareholder confidence.
Tender Offer vs Buyback: Corporate Cash Moves Compared
If you’re thinking that a tender offer made by a firm for its own shares sounds an awful lot like a share buyback, you’re right. In effect, it is a buyback, though a special sort of buyback. But, a tender offer is not necessarily a share buyback – it depends on who is making the offer.
What is the difference between a tender offer and a buyback?
A tender offer is a public bid by a company or third party to buy shares from shareholders at a premium, often to gain control or influence, regulated by the SEC with a 20-day minimum period.
A buyback is when a company repurchases its own shares to reduce outstanding stock, boost value, or return capital, typically through open market purchases or private negotiations.
Tender offers are often strategic for acquisitions, while buybacks focus on capital management. Buybacks under SEC Rule 13e-4 require similar disclosures if structured as a tender offer, but open-market buybacks are less regulated.
Key Takeaways: Your Guide to Tender Offers
So, what should you take away from all this?
We think that there are ten critical points that you have to keep in mind when approaching stock tender offers:
- Capture the Premium: Tender offers often provide a price above market value, allowing investors to sell shares for immediate profit.
- Act Quickly: Evaluate the offer within the 20-day minimum period to avoid missing the opportunity.
- Assess Fair Value: Compare the offer price to the company’s intrinsic value; if undervalued, holding shares may yield higher future returns.
- Monitor Stock Price: Pre-offer price surges can offer early selling opportunities if the premium is already reflected.
- Consider Partial Tendering: Tender some shares to lock in gains while retaining others for potential upside.
- Watch for Competing Bids: In competitive situations, holding out may lead to a higher offer from another bidder.
- Evaluate Bidder’s Plans: Understand the bidder’s intentions (e.g., merger, privatization) to gauge long-term share value if you don’t tender.
- Account for Taxes: Factor in capital gains taxes when calculating net profits from accepting the offer.
- Research Company Prospects: If the company has strong growth potential, refusing the offer could lead to greater long-term gains. Sometimes it’s worth betting on the stock being purchased.
- Seek Odd Lot Tenders: If you are content putting a small amount of capital to work, odd lot tender offers place you at the head of the pack in terms of purchase priority.
Careful analysis of the offer, company fundamentals, and market conditions maximizes profit potential. Remember, each company and situation is unique, so you need to assess each offer independently to maximize your investment returns.
Where Do You Find Tender Offers?
You can track these on social media or with a Bloomberg terminal, but quite frankly, that takes a lot of time and effort.
The best way to track new tender offers is to sign up for a service alerting you to newly announced events. Even better if it’s free.
That’s why I created our free Event Driven Daily Morning Brew. Each month, we send our subscribers a full list of all the deals that we’ve uncovered over the prior 30 days. Now, rather than going out to try to find these special situations, they’re sent directly to your inbox.
Enter your email in the box below because we’ll save you a huge amount of time and effort trying to find these deals by yourself.
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