In this segment of "Financial Planning Q&A" on Motley Fool Live, recorded on Dec. 1, Fool contributor Dan Caplinger discusses some different scenarios when selling stock back to a company.
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Dan Caplinger: It's offering a Dutch auction tender offer. What is that? What are the pros and cons of accepting the offer?
Retiree, you may be aware that companies often will authorize the company to buy back shares from time to time, and there is more than one way to do that. A lot of companies, they just say, yeah, we can go into the open market, we can be a buyer of the stock. We will do that from time to time, we don't have to tell you exactly when we're going to do that.
When we do it though, we'll take that stock and either retire it or keep it in our treasury. The net effect is to return capital to shareholders. Shareholders tend to like that. Those announcements tend to be taken favorably.
Every once in a while, companies will be a little bit more organized about it. That's what this one seems to be doing. This Dutch auction, basically, the company is inviting shareholders to come to the company and say we would be willing to sell our stock back to you at a given price and you get to fix the price.
Now I looked at this tender offer really quickly and there's a range of prices that it will accept. It's not going to pay more than a certain amount, it's not going to pay less than a certain amount, and depending on how many offers it gets, it may take it.
Now, the question does it make sense to participate in these, the answer is usually it depends. A lot of time you get the benefit to you comes just from the offer having been made in the first place. The stock will often rise in value if the tender offer amount was above what the stock was trading for at the time.
In this case, if the range was above where it was before, then it may be a bargain. It really comes down to you're not going to know whether it was a great deal or not until the auction is over and you find out what the results are.
Sometimes the company ends up paying more than what the market price was, sometimes the company pays less. It's hard to tell. If you want to participate, you're going to work through your broker and you're going to need to tell your broker what price you want to accept.
I guess if you are more inclined to hold onto the stock but don't want to miss out on a potential windfall, you can always set a high price, and if the high-price hits then hopefully you're happy selling it, and if it doesn't then you're still just as happy because you're holding the stock.
But it's something you don't have to necessarily pay attention to it, but it may be smart to do so financially. I can't really give specific advice on this one. But it's something that does affect more than just one company. It's always worth taking a look when your company makes an offer like this to decide whether you're going to participate or not.
