Tender offer

Definition

A tender offer is a public proposal made by an individual or company to purchase some or all of shareholders' shares at a specified price, typically at a premium over the current market price. This strategy is often employed in the context of mergers and acquisitions as a way to gain control of a target company, as it directly appeals to shareholders, offering them an opportunity to sell their shares for cash or other securities.

5 Must Know Facts For Your Next Test

1. Tender offers can be friendly or hostile; a friendly tender offer is supported by the target company's management, while a hostile tender offer is opposed.
2. The price offered in a tender offer is typically higher than the market price to incentivize shareholders to sell their shares.
3. Regulatory bodies, like the Securities and Exchange Commission (SEC), require that tender offers disclose specific information, ensuring transparency in the process.
4. Tender offers usually come with a deadline by which shareholders must decide whether to accept the offer.
5. If successful, a tender offer can lead to significant changes in the ownership structure of a company and often results in strategic shifts in its operations.

Review Questions

• How does a tender offer differ from traditional methods of acquiring shares in a company?
  • A tender offer differs from traditional methods of acquiring shares because it involves a public solicitation directly targeting shareholders, inviting them to sell their shares at a premium. Traditional methods usually involve purchasing shares on the open market or negotiating with company management. Tender offers often bypass management altogether, especially in hostile situations, making them a more aggressive approach to acquiring control of a company.
• Discuss the implications of a successful tender offer on both the acquiring and target companies involved in the transaction.
  • A successful tender offer can have profound implications for both companies. For the acquiring company, it may lead to increased market share, operational synergies, and enhanced competitive positioning. Conversely, for the target company, it could result in changes in leadership, strategic direction, and corporate culture. Additionally, if the tender offer was hostile, it may lead to resistance from current management and employees, affecting morale and productivity.
• Evaluate the strategic reasons why a company might choose to make a tender offer rather than pursuing alternative acquisition strategies.
  • A company might opt for a tender offer instead of other acquisition strategies due to its direct approach and potential speed in gaining shareholder approval. By appealing directly to shareholders, an acquirer can bypass potential delays associated with negotiations with management. This strategy can also be effective in situations where management is resistant or uncooperative. Additionally, offering a premium price can create urgency for shareholders to accept the offer quickly, facilitating faster ownership transfer and allowing the acquirer to implement their strategic vision sooner.

Related terms

hostile takeover: An acquisition attempt by an entity that is opposed by the management and board of the target company, often involving a tender offer made directly to shareholders.

shareholder activism: The efforts of shareholders to influence a company's behavior by exercising their rights as owners, which can include opposing management decisions or supporting tender offers.

merger agreement: A formal arrangement between two companies to combine their operations, which may be facilitated through a tender offer to acquire one company's shares.