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Hedged Tender



Definition

A hedged tender is a strategy used by investors in a takeover situation. Essentially, investors purchase shares of a company that’s targeted for acquisition, while simultaneously short selling the acquiring company’s stock, essentially betting that it’s going to decline. This approach mitigates risks associated with the potential failure of the acquisition or merger deal.

Phonetic

The phonetic pronunciation of “Hedged Tender” can be represented as: /’hɛdʒd ‘tɛndər/

Key Takeaways

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  1. Hedged Tender involves a strategic move by investors where they simultaneously buy shares in a company and offer to sell these shares (tender them) back to the company. This strategy is usually adopted when a company announces a buyback of its shares.
  2. The main motive behind the hedged tender strategy is to take advantage of the difference in the current market price of the share and the buyback price announced by the company. This strategy lets the investors enjoy a risk-free profit if the buyback is successful. However, it is not always guaranteed that the company will buy back all the tendered shares.
  3. In financial risk management, a hedged tender strategy can help mitigate the risks associated with fluctuation in the prices of the shares in the open market. By locking in a selling price (the buyback price), investors can avoid potential losses due to a decrease in the share price beyond the buyback price.

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    Importance

    Hedged Tender is an important business/finance term notably in the context of mergers and acquisitions. When a company plans to acquire another entity, it usually offers to purchase shares from the existing shareholders – this is where the concept of hedged tender comes into play. The shareholders have the option to tender their shares, but to mitigate the risk of the acquisition not going through, they hedge their position. This strategic move protects their interest by simultaneously taking a short position in the targeted company’s stock. This combination of tendering shares and hedging provides a safety net for shareholders, minimizing potential losses if the deal falls through, hence, making hedged tender a crucial element in the financial sphere.

    Explanation

    Hedged tender is a strategic approach in corporate finance used primarily in the context of takeover bids, merger and acquisitions. The main purpose of a hedged tender is to secure a favorable position for an investor by having the ability to participate in a tender offer while minimizing risk from unfavorable price movements. It is essentially a risk management strategy that allows investors to hedge their positions, ensuring they are not negatively impacted by any price fluctuations in the market. In the context of a tender offer, an investor can utilize a hedged tender strategy by simultaneously selling short shares of the same company. By doing this, the investor effectively offsets the risk of their tendered shares falling in value. If the cash price being offered in the takeover bid is higher than the current share price, the investor can lock in the profit generated from the spread between the two. Hence, hedged tenders serve as an essential tactic used to mitigate financial risk, safeguard potential gains and optimize investment portfolio performance.

    Examples

    1) Hostile Takeover Hedge: In 2019, Occidental Petroleum Corporation made a hostile bid to acquire Anadarko Petroleum. Anadarko was originally in talks with Chevron Corporation for a merger when this offer from Occidental came in. Chevron also had a hedged tender strategy in place, in which they had the right to make another offer or withdraw their offer without significant financial losses.2) Precious Metal Hedging: Gold mining companies regularly use hedged tenders to protect themselves against fluctuating gold prices. In 2020, Newcrest Mining, a leading gold mining company, hedged a portion of its expected gold production to guarantee a bottom-line price for their gold. By doing this, they secured their financial standing despite gold price volatility.3. Foreign Currency Exchange Risk: Companies operating in multiple countries often use hedged tender as a financial strategy to reduce risks related to foreign exchange rates. For example, in 2018, Airbus used hedged tender contracts to mitigate the risk of the Euro’s appreciation against the U.S. dollar, which could have a significant impact on their profit margins given that the aviation industry primarily operates in U.S. dollars.

    Frequently Asked Questions(FAQ)

    What is a Hedged Tender?

    A Hedged Tender refers to a strategy used in a takeover situation where the investor buys shares in the target company while simultaneously short-selling shares of the acquiring company. This strategy is commonly used to minimize risk.

    In what situations is a Hedged Tender commonly used?

    A Hedged Tender is typically used by investors who want to hedge their positions during company takeovers, mergers, or other major corporate actions. It helps to potentially protect against a decrease in the value of the acquiring company’s stock.

    How does Hedged Tender work?

    An investor purchases shares in a company that is being acquired while simultaneously selling short the shares of the parent company. This strategy allows the investor to potentially make money, regardless of stock market conditions.

    What advantages does a Hedged Tender strategy offer?

    Hedged Tender, when executed successfully, can be a powerful risk management strategy, potentially insulating an investor from market volatility and downturns in the acquiring company’s share price post-acquisition.

    What are the risks associated with a Hedged Tender strategy?

    Despite its potential advantages, a Hedged Tender strategy assumes that the deal between the companies will close. If the takeover falls through, the investor could potentially face losses on the short side. Hence, it is not without its risks and should be undertaken with diligence.

    What is short-selling in a Hedged Tender strategy?

    Short-selling involves selling a stock that you do not currently own, with the expectation that you can buy it back at a later date for a lower price. In the context of a Hedged Tender, it would mean selling shares of the acquiring company.

    What factors should be considered before implementing a Hedged Tender strategy?

    Before implementing a Hedged Tender strategy, an investor should examine the terms of the proposed deal, the potential for the deal to close successfully, the overall stability of both companies involved, and the market’s reaction to the announcement of the deal.

    Can an individual investor make use of the Hedged Tender strategy?

    Yes, individual investors can apply the Hedged Tender strategy. However, it requires an understanding of both fundamental analysis of the companies involved, and an understanding of how different corporate actions can effect share prices. Also, since it involves selling short, an individual would need to be approved for this advanced trading strategy by their brokerage.

    Related Finance Terms

    Sources for More Information


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