McDonald's (NYSE:MCD) investors might have been surprised last week to learn someone was offering to buy their stock. The burger joint announced TRC Capital was offering to buy up to 1.5 millions shares of McDonald's stock, or 0.15% of the total outstanding, for $86.80 per share.
But this isn't a regular tender offer, such as when an investor wants to take over or influence the direction of a company. Rather, it's an unsolicited mini-tender offer, a completely different kind of bid and one McDonald's is right to urge its investors to reject.
The ugly truth about mini-tender offers
Mini-tender offers are a rather insidious practice, and as a rule investors should dismiss them out of hand. Here are six reasons McDonald's investors should reject the latest offer:
- They tread in the relatively unregulated, dark underbelly of SEC oversight.
- Even the SEC cautions investors before tendering their shares.
- They prey on novice or uninformed investors.
- Investors face numerous pitfalls in tendering their shares.
- It undervalues McDonald's stock.
- It is essentially a quick-buck scheme by TRC Capital, which has made mini-tender offers a veritable cottage industry.
Not all tender offers are the same
Many investors are familiar with tender offers bids by one company in an attempt to acquire the shares of another, often at a premium, in order to take control of it. Companies must follow strict SEC rules to make such offers to ensure all shareholders are treated fairly.
Mini-tender offers -- which are bids to acquire less than 5% of a company's stock -- don't have any similar rules to follow. So long as the company making the offer doesn't lie about the bid, they typically fly under the SEC's oversight radar. There is nothing inherently illegal or wrong with a mini tender offer, there's just little in them to commend them for the average investor. As the SEC notes:
Many investors who hear about mini-tender offers surrender their securities without investigating the offer, assuming that the price offered includes the premium usually present in larger, traditional tender offers. But they later learn that they cannot withdraw from the offer and may end up selling their securities at below-market prices.
How low can you go
Virtually all mini-tender offers are lowball bids for a company's stock, giving knowledgeable shareholders little incentive to sell. In McDonald's case, TRC Capital -- perhaps the most prolific trafficker in this legal loophole -- is offering to buy the burger chain's shares at a 4.4% discount to the $90.80 closing price on Jan. 20, the last trading day before the mini-tender offer was commenced. McDonald's stock closed out last week at $93.99, up 3.5%.
TRC Capital is making the offer because it can make a quick buck by catching McDonald's investors unawares. If it was to sell right now whatever shares might have been tendered, it could make a fast 8% gain on the increased price since the offer was made.
Search the Internet for "mini tender offer" and more often than not you'll find TRC Capital's name associated with it. It routinely makes such below-market offers on large companies in hopes of making a quick profit on the stock's hoped-for jump in price. In recent months the investment shop has also made unsolicited mini tender offers for Whole Foods Market, Celgene, and Electronic Arts.
A minefield of trouble
The problem for investors is that after tendering their shares, if the stock actually drops in value, TRC Capital is allowed to cancel the offer. There's nothing that says it must follow through. That could be a particularly problematic if the tender offer's deadline was extended and the value of the shares has sharply fallen.
As noted, mini-tender offers are perfectly legal, as they should be. While unsuspecting investors are seemingly being "tricked" into tendering their shares, there's nothing wrong with offering to buy someone's stock at a below-value price. An investor doesn't have to sell, and it shouldn't be the SEC's responsibility to protect us from our own greed or fear. Educating investors on the nature of mini-tender offers will do more to end the practice.
Still value in the burger king's stock
McDonald's hasa number of challenges before it. Not only must it face the rising tide of "better burger" shops luring its customers away, but it has an overly complicated menu, a disgruntled franchisee base, new technology implementation to give customers greater opportunities for personalization, and the sudden departure of its CEO.
That's a full plate of issues, but none that can't be surmounted. While I wouldn't buy McDonald's stock at the moment, if I was a shareholder I wouldn't tender my shares to TRC Capital, either. The tender offer might be "mini," but investors will realize they made a big mistake if they give up their shares now.