Tender Offer

Definition

A tender offer is a formal proposal made to shareholders by an entity to purchase or sell its securities for a specific price within a certain timeframe. It is often used during takeover attempts, as the offer is typically higher than the current market price of the shares. The shareholders can then decide whether or not they wish to sell their shares at the offered price.

Phonetic

The phonetics of “Tender Offer” is: /ˈtɛndər ˈɔfər/

Key Takeaways

Sure, below are the three main takeaways about Tender Offer.“`

A Tender Offer is a formal proposal made by a buyer to purchase some or all shareholders’ stocks in a company. It often represents an effort to take over another company, or may simply represent an attempt by a company to reduce the number of outstanding shares on the market.
The price offered in a Tender Offer is usually higher than the current market price of the stock. This is done to provide an incentive for shareholders to sell their shares.
Tender Offers are subject to complex legal regulations to protect investors. Some of these regulations include a mandatory offering period, the right for investors to change their minds and withdraw their shares before the offer period expires, and compulsory disclosure of the identity of the party making the offer.

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Importance

A Tender Offer is a crucial financial term, primarily in the field of mergers and acquisitions. It is a formal proposal by an entity willing to purchase a specific number of shares of another company at a particular price, often higher than the current market rate. The importance of a tender offer lies in its ability to potentially gain control over, or merge with, another company, without needing approval from the target company’s board of directors. It provides a direct route of negotiation with shareholders directly and can facilitate a faster acquisition or merger process. On the flip side, for shareholders, a tender offer often represents an opportunity to sell shares at a premium, making it beneficial for both parties. Hence, understanding the mechanism and implications of a tender offer is essential for anyone involved in corporate transactions and investments.

Explanation

A tender offer serves as a strategic tool primarily used in corporate finance by an individual, a group of investors, or a company who plans to takeover a public company. This proposition aims to purchase a significant portion, if not all, of the target company’s shares, usually at a premium to the current market price. This typically occurs when the bidding entity believes that the company is undervalued or possesses potential for strategic integration or profitability enhancement.The purpose of a tender offer is manifold. It is an expedient way to acquire a controlling stake in a company without needing to go through the board of directors or upper management, thereby sidestepping potential resistance to the acquisition. Additionally, by offering shareholders a higher price for their shares, the bidding entity provides an incentive for them to sell. This method can also bring about a swift acquisition, given that the offer only stands for a limited time. Thus, it forces the shareholders to make a decision promptly, speeding up the takeover process.

Examples

1. In 2019, Disney made a tender offer to increase its stake in Disneyland Paris by acquiring outstanding shares from its stockholders. Disney offered a specified price per share, which was a premium to the market price, motivating shareholders to sell their shares.2. In 2000, Unilever, the consumer goods giant, launched a tender offer to purchase all outstanding shares of Ben & Jerry’s, the ice cream company, for a certain price per share which was higher than the market price. The purpose was to acquire full control over Ben & Jerry’s.3. In 2016, Microsoft Corporation announced a tender offer to buy LinkedIn Corporation. In the deal, LinkedIn shareholders received $196 per share in cash, which was a substantial premium to where LinkedIn was trading. It was a strategic move by Microsoft to broaden their services in the professional social networking arena.

Frequently Asked Questions(FAQ)

What is a Tender Offer?

A Tender Offer is a proposal made publicly by one company to purchase the stocks of another company at a specific price, usually higher than the current market value. It’s a strategic tool used in acquisitions and takeovers.

How does a Tender Offer work?

When a company launches a Tender Offer, it sends a letter to stockholders of the target company, offering to purchase their shares at a fixed price. The shareholders then have the option to ‘tender’ (i.e., sell) their shares or not.

Why might a company make a Tender Offer?

A company could initiate a tender offer for various reasons. These include gaining control over another company, achieving a majority stake, or consolidating the industry. The offer is typically more than the current market value to incentivize shareholders to sell.

What risk does a Tender Offer pose to shareholders?

The main risk for shareholders is that the buying company may not follow through on the Tender Offer, leaving them with shares that could have been sold at a higher price. Additionally, if the majority of shareholders do not accept the offer, the buyer’s price and the market price may drop.

How long does a Tender Offer typically last?

By law in the U.S., a Tender Offer must remain open for at least 20 business days. However, the offering company may extend the offer period if desired.

What happens if not enough shareholders accept the Tender Offer?

If not enough shares are tendered, the offering company can choose to withdraw the offer. Alternatively, it may choose to extend the offer period, or increase the offer price to encourage more shareholders to tender their shares.

Is a Tender Offer the same as a takeover bid?

A Tender Offer is a method used in a takeover bid. A takeover bid is the overall process or plan by which one company attempts to gain control of another, while a Tender Offer is a specific strategy used during this process.

How are shareholders notified of a Tender Offer?

Shareholders are usually informed about a Tender Offer through a notification from their broker or from the target company itself. Additionally, the offering company must file documentation with the Securities and Exchange Commission, which is made publicly available.

Related Finance Terms

Hostile Takeover
Shareholder Rights Plan
Acquisition
Securities and Exchange Commission (SEC)
Due Diligence

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