What Is a Tender Offer?

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A tender offer is a method through which a potential investor in a company can purchase shares of stock in a company for a limited amount of time without doing so on the open market. In many cases, the buyer will pay more than market value for the stock, a benefit to the seller. This type of purchase can be a sign of big changes at a company, such as an impending takeover or control over a board of directors.

Why It Happens

  • In many cases, a tender offer is made because an investor is attempting to acquire a large stake in a company in order to take it over. Sometimes, the sale of a large block of publicly traded stock can be spotted by a company's board of directors, prompting pre-emptive action. Other times a large purchase must be made public. For example, if an individual or entity acquires 5 percent of a company, the purchase must be reported to the Securities and Exchange Commission.

The Takeover

  • There are multiple reasons why an investor would usw this use this strategy to trigger a takeover. Some of the most likely reasons are that the investor sees the company as a wise investment, wishes to merge the company with another or wishes to take over the company so he can sell off the company's assets at a profit.

The Money Involved

  • The tender offer is usually made at a per-share value above the open-market value. This entices stockholders into selling. The investor can take that extra value, plus the short-term boost in the value of the stock, into account when making the tender offer. By combining these factors, the investor could gather enough stock to take over the company in a short time.

Filing The Paperwork

  • Because the SEC regulates purchases of more than 5 percent of a company's stock, there's paperwork involved. The SEC requires certain filings to be made by those making a tender offer, including a Schedule 13D, when they own or will own 5 percent or more of the company as a result of the sale. This provides information to the public about the person making the tender offer. The company that is facing the tender offer must file an answer, called Schedule 14D-9.

Mini-Tender

  • If an investor is not looking to take over a company, and rather just wants to buy some stock, they can work around the SEC requirement if they make a tender offer for less than 5 percent of the company. This is known as a mini-tender offer. But there's a drawback for the stockholder who might accept that offer. Because the SEC doesn't regulate mini-tenders as closely, the stockholder could actually get less than market value in some cases.

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