A company in your portfolio is offering a tender offer buyback. At first, it sounds appealing, but wait, aren’t a tender offer and a buyback the same? And if not, which one is better? Time to get educated, so with the laptop open, you pull up Event Driven Daily’s synopsis: Tender Offer vs Buyback: Where Do They Apply? This is what you discover …

Tender Offer vs Buyback: Where Do They Apply?

Tender offers and buybacks are processes used by companies to repurchase their shares from the market. Where they apply depends on the company’s objectives.

Tender offers are used for immediate, large-scale strategic implications, such as the acquisition of another firm, increasing ownership in a subsidiary, or used to prevent a hostile takeover.

Buybacks, also known as share buybacks, is a more gradual method of company share acquisition. A firm repurchases its shares to take advantage of their stock’s undervaluation, return capital to shareholders, and improve financial ratios. Let’s answer tender offer vs buyback by examining the application and key differences.

Tender Offer Application

Strategic Objective – Tender offers are company solicitations to existing shareholders to sell their shares to the firm at a premium. This strategy is employed to consolidate ownership, stave off the acquisition of an unwanted acquirer, optimize the firm’s capital structure, and for tax efficiency.

Large Scale Acquisitions – Tender offers are effective applications when a company seeks to repurchase a substantial percentage of their outstanding shares in a short period.

Targeted Tenders – Tender offers can be a target application by extending the offer to repurchase the shares of only hedge funds, large family offices, or institutional investors.

Ownership Control – Mergers and acquisitions commonly use tender offers to entice a target firm’s shareholders to sell their shares to gain control of the target.

Tender offer vs buyback has touched on a few applications of tender offers, now let’s look at buybacks.

Buyback Application

Buybacks are open market company share repurchases in accordance with a board approved per-announced plan.

Return Capital to Shareholders – Firms with excess cash may elect to buy back their shares and return value to shareholders. Buybacks can be more tax efficient than dividend distributions.

Stock Price Bolster – Buybacks reduce the company’s number of outstanding shares leading to higher earnings per share (EPS), which temporarily elevates the stock price. This positive externality supports the share price during periods of economic downturn.

Execution Flexibility – An attractive application of buybacks is flexibility. Companies can choose opportune times when to repurchase their shares, exceptionally when they feel their stock is trading under intrinsic value.

Buybacks and tender offs are similar because they are acquisition methods of repurchasing company shares. However, tender offer vs buyback have their differences.

Key Differences

Execution – Tender offers are a publicly announced time sensitive event. The price offered and terms and conditions are provided in the announcement and in the SEC (Securities and Exchange Commission) filing. Buybacks are an announced plan featuring a total dollar amount designated for share repurchases over an extended period.

Price – Tender offers are priced at a premium to the current stock price. Buybacks are executed at favorable market prices.

Speed and Scale – Tender offers are quick, large-scale repurchases, and buybacks are gradual, scalable market-dictated repurchases.

Regulatory Compliance – Tender offers can be subject to regulatory compliance and mandatory disclosure requirements. Buybacks also have regulatory guidelines and must adhere to safe harbor provisions but tend to be far less stringent.

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