Tender offer

Definition

A tender offer is a public proposal made by an individual or a company to purchase some or all of shareholders' shares at a specified price, usually at a premium over the current market price. This strategic move is often used in the context of mergers and acquisitions as well as share repurchase programs, providing a means for companies to acquire control or consolidate ownership while incentivizing shareholders to sell their shares.

5 Must Know Facts For Your Next Test

1. Tender offers can be classified as either friendly or hostile, depending on whether the target company's management supports or opposes the offer.
2. The price offered in a tender offer is usually set above the current trading price to encourage shareholders to sell their shares.
3. Tender offers are often subject to regulatory scrutiny and must comply with securities laws to protect investors.
4. Companies may use tender offers as a tool to consolidate ownership by buying out minority shareholders.
5. The outcome of a tender offer can significantly impact stock prices, not only for the target company but also for competitors and the broader market.

Review Questions

• How does a tender offer differ from other methods of acquiring shares such as open market purchases?
  • A tender offer differs from open market purchases in that it is a formal proposal made directly to shareholders, offering a specific price for their shares, typically at a premium. In contrast, open market purchases involve buying shares through regular trading without a defined proposal. Tender offers can create urgency for shareholders and provide more immediate liquidity, while open market purchases may be more gradual and subject to prevailing market conditions.
• Discuss the potential advantages and disadvantages of using a tender offer in a merger or acquisition strategy.
  • Using a tender offer in mergers or acquisitions can provide several advantages, such as attracting more shareholder support due to the premium offered, creating faster access to ownership control, and simplifying the acquisition process compared to negotiations with management. However, disadvantages include possible resistance from the target's management if they oppose the offer, potential regulatory hurdles that could delay or block the acquisition, and the risk of paying more than necessary if shareholders reject the offer or if market conditions change unexpectedly.
• Evaluate how tender offers influence shareholder behavior and market dynamics during an acquisition process.
  • Tender offers significantly influence shareholder behavior by presenting an immediate financial incentive to sell their shares at a premium, which can lead to rapid changes in ownership structure. This immediate liquidity can prompt shareholders who might not otherwise sell to reconsider their positions. Additionally, tender offers can create volatility in the stock price of both the target and acquiring companies, affecting investor sentiment and market perceptions. The strategic timing and execution of tender offers can shift market dynamics as they attract attention from analysts and investors alike, potentially leading to speculation about further mergers or changes in competitive landscapes.

Related terms

share buyback: A share buyback is when a company purchases its own outstanding shares to reduce the number of shares available on the open market, often to increase the value of remaining shares.

merger: A merger is the combination of two companies to form a new entity, typically to increase market share, efficiency, or access to resources.

acquisition: An acquisition occurs when one company purchases another company, gaining control over its assets and operations, often seen as a method of growth.