Tender Offer

What is a tender offer?

A tender offer is a public proposal to buy some or all of a company’s outstanding shares at a specified price within a defined time window. The offer price is usually set at a premium to the current market price to encourage shareholders to sell. Tender offers can be for equity (shares) or for debt (repurchasing bonds or other obligations). An exchange offer is a type of tender offer in which the bidder offers securities or other non-cash consideration in exchange for shares.

How a tender offer works

• A bidder (an acquirer, investor group, private equity firm, hedge fund, or sometimes the company itself) announces an offer to purchase shares at a fixed price for a limited period.
• The offer often includes conditions, such as a minimum or maximum number of shares that must be tendered for the transaction to proceed. In takeover attempts, the bidder may require enough shares to gain a controlling interest.
• Shareholders decide whether to tender (sell) their shares at the offered price. If they tender, they must follow the procedures and deadlines in the offer documents.
• Depositary banks and transfer agents typically verify share ownership and handle payments to tendering shareholders.
• Once shares are accepted and paid for, they become the purchaser’s property and can be held or sold at the purchaser’s discretion.

Market reaction:
* Immediately after an offer is announced, the target’s share price often trades below the offer price, reflecting uncertainty and the time required to complete the tender. As the closing date approaches and conditions are resolved, that spread usually narrows.

Regulatory note:
* U.S. securities laws require parties acquiring 5% or more of a company’s shares to disclose their holdings to the company, the SEC, and the stock exchange.

Example

Company A trades at $10 per share. An investor launches a tender offer of $12 per share but conditions the offer on acquiring at least 51% of outstanding shares. If enough shareholders accept, the investor gains control at a premium to the prior market price.

Advantages

• Faster path to control: Acquirers can often secure control more quickly than through negotiated mergers.
• Price certainty: The fixed per-share price provides clarity to shareholders deciding whether to sell.
• Conditionality: Bidders can limit exposure by making offers contingent on reaching minimum thresholds or regulatory approvals.
• Flexibility for acquirers: Tender offers can be structured with escape clauses (for example, if antitrust approval is denied).

Disadvantages

• Costly: Tender offers involve significant expenses — legal, advisory, SEC filing fees, and potentially higher offer prices if competing bids emerge.
• Time-consuming operationally: Verifying tenders, processing payments, and resolving disputes take time and resources.
• Competitive bidding: Other bidders can drive the price up, reducing expected returns.
• Hostile dynamics: Offers pursued without board approval can lead to resistance, litigation, or defensive measures by the target.

When tender offers are used

• Hostile takeovers where the bidder bypasses the board and appeals directly to shareholders.
• Friendly buyouts where the bidder negotiates terms with the board and then solicits shareholder acceptance.
• Share repurchases by a company seeking to reduce outstanding shares.
• Debt restructuring, where issuers offer to repurchase or exchange bonds.

Key takeaways

• A tender offer is a public, time-limited bid to buy shares at a specified price, usually above market.
• Offers may be conditional (e.g., minimum share acceptance) and can be used for both control acquisitions and repurchases.
• Tender offers provide speed and price certainty but can be expensive and complex, especially in contested situations.