Tender Offer

A tender offer is announced when a company intends to buy a part of its own outstanding shares. This can be done for various reasons, such as capital return to shareholders or maybe management simply thinks that shares are very cheap at the moment. Usually, the consideration comes in cash, and to incentivize participation, the offer is done at a premium to the share market price. Because of the premium, the offer might end up oversubscribed, and leave some of the tendered shares not accepted (prorated). This creates a certain risk, as quite often after the tender offer is closed, shares drop to around pre-announcement levels, which may result in a significantly lowered profit or even loss for the whole trade.

There are two types of tender offers – a normal tender, with a fixed size and consideration per share, and a dutch tender offer. Dutch tender offer is a bit different and functions more like an auction – the company announces a total consideration amount and states a price range in which it will accept the shares. Shareholders then choose the lowest price in which they will tender. The company starts accepting the tendered shares from the bottom of the range and continues until the total consideration amount is filled up. Higher participation in the offer indicates a higher likelihood that upper limit prices won’t even be reached.

Overall, for a tender offer, it is crucial to estimate the likelihood of proration and, for a dutch auction, at which side of the range the final price is going to settle. The size of the offer can be a good hint as larger tenders have higher chances of low/no proration, while smaller transactions (e.g. 5%-10%) often end up significantly oversubscribed. Sometimes the offer documents state information regarding the participation of major shareholders. If large shareholders or management that owns a considerable stake has agreed to abstain from participating, this indicates the odds of lower proration (higher price for a dutch tender). However, if the company is buying only 8% of the outstanding shares, while 5% of shareholders have already confirmed to tender, it might be not the best idea to put your money in such a transaction. Furthermore, if the company has done any other similar tenders in the recent past – their results might provide some hints regarding shareholder activity and potential participation of the current offer.

Don’t forget to look into taxation matters. This is an important aspect in certain markets (e.g. Canada), where withholding taxes can consume a sizeable part of the upside.

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