If an investor wants to take control of a company -- or if a company wants to buy back its own securities -- they may make a tender offer. A tender offer is a public bid from an investor or investment group to buy a large number of a company's shares. Usually, it applies to all shareholders or a substantial majority, and the bid is often at a premium above the market price.
What is a tender offer?
What is a tender offer?
A tender offer is a publicly advertised solicitation to buy a number of shares or securities (usually 50% or more) for a specified amount. A tender offer can come from a third-party company seeking to take control of another company or a company looking to buy back its shares. When a company wants to acquire its own shares, it's referred to as an issuer tender offer.
Share
When a company makes a tender offer, the bid applies to each individual shareholder. The offer is for a fixed price and is only good for a limited period. The purchase price is usually higher than the market price for the security because the goal is to incentivize security holders to sell.
The offer is often conditional. If the company doesn't acquire a minimum number of shares or value of securities, the party that made the offer may have no obligation to follow through on the purchase.
Sometimes, a tender offer is used as a strategy for a hostile takeover, which occurs when an acquiring party bypasses the company's management team and goes directly to shareholders.
Tender offer rules
The rules surrounding tender offers
The U.S. Securities and Exchange Commission (SEC) and the Exchange Act of 1934 regulate tender offers. The rules vary somewhat, depending on whether the offer is for a company's stock or debt (referred to as a bond tender offer) and whether the issuing company or a third party is attempting to acquire the securities.
The bidder typically must place an advertisement, known as a tombstone, in a major U.S. newspaper and mail a copy of the offer to individual shareholders. The offer must be open for a minimum of 20 business days.
Should shareholders accept a tenter offer?
Should shareholders accept a tender offer?
If you own stock in a company subject to a tender offer, the bid could represent an opportunity to sell shares for significantly more than their market value. The offer may allow you to make a nice profit, although it's important to consider the potential capital gains taxes.
A tender offer may not be worth accepting, though, if you're a buy-and-hold investor who believes the stock's price can soar in the long term. Should you wish to participate in a tender offer, you'll need to notify your broker. Otherwise, you won't need to respond. If you don't respond by the deadline, you've essentially rejected the offer.
An example tender offer
Example of a tender offer
An investing group made a tender offer in December 2023 to purchase all outstanding common stock of struggling retail department store Macy's (M 0.9%) for $5.8 billion. The investment group comprises Arkhouse Management (a real estate investment firm) and Brigade Capital Management (an asset management firm).
The Wall Street Journal reported that the group already owns a large stake in Macy's through Arkhouse-managed funds. The offer was for $21 per share, which was about a 32% premium above the price at the close of the previous trading day.
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Macy's board of directors rejected the bid in late January 2024, saying it "lacks compelling value." As of this writing, a hostile takeover looked like a possibility since Arkhouse said in a statement that it was willing to "pursue all necessary steps, including direct engagement with stockholders" in its efforts to acquire the retailer.
