Discussing takeovers, it is only logical to discuss how they are most often conducted, as when dealing with publicly-traded companies, there is a certain procedure to follow and certain actions that must be taken, most of which cause people’s eyes to get that far-off stare. So, with today’s word tender offer, we can hopefully shed a little light on what happens when a takeover occurs.
Simply put, a tender offer is a public offer to purchase an amount of shares in a company for a set price per share. Breaking the phrase down, this is essentially an ‘offer’ that is being ‘tendered,’ or presented, to shareholders, usually – as an incentive to sell – above the current market price of the stock.
The verb tender entered English circa 16th century through the Middle French verb tendre ‘to offer’, stemming from the Latin tendere ‘to stretch, extend.’ The meaning of the noun as ‘a formal offer duly made by one party to another’ developed during the same period, to extend to the specific sense of legal tender (money or other things that are legally tendered or offered in payment) by the 1740s, and the term tender offer to be first recorded and explained in an Investor’s Dictionary from 1964 as: “In general when an outside interest makes a tender offer the market price rises close to the tender price”.
Outside of a basic explanation, which, admittedly, can still be somewhat confusing, here is how it often works. First, an investing entity, such as an investment fund, investor group, or even the company itself, will publicly announce their intention to purchase a certain amount of shares at a certain price. The offer to buy the shares at a certain price is the tender offer; moreover, if this act is done by an outside company without the consent of the target company’s board of directors/management, that is what makes it a hostile takeover. If the selling investor accepts the offer, they will receive a higher price/value for their shares, which will be sold to the investing entity, who will gain the ownership and voting rights of the company’s shares.
Aside from legal requirements, tender offers come with their own set of benefits and drawbacks, making them ideal for some situations and bad for others.
Beneficially, tender offers can give an investing entity control of a company in a month, where management negotiations would take significantly longer; there are numerous escape clauses if the situation with the company changes or if the target number of shares to be obtain isn’t met; and no massive outlay of funds is required before initiating the tender offer itself. Conversely, tender offers can also be a bit risky because of their cost and outside factors: they can be expensive, due to the cost of legal filings, attorney fees, and specialist fees; if done without the target company’s approval, this could cause the company to take action to preserve its independence (e.g. macaroni defense, poison pill) or it could attract the attention of other bidders for the target company, resulting in a higher cost of acquisition; finally, as with anything in business, there are no guarantees that the target company will prove to be worth the price paid for it.
