Definition
A tender offer is a corporate finance term that refers to an offer made by a company or an individual investor to purchase a significant portion of another company’s shares. The offer is typically made at a price above the current market price, creating an incentive for shareholders to sell. This is often used in takeover attempts for gaining control of the target company.
Key Takeaways
- A Tender Offer is a proposal made publicly and directly by one company to purchase the shares of another company, usually at a higher price than the current market price. It’s a type of takeover strategy used in mergers and acquisitions.
- Tender Offer provides a unique opportunity for shareholders to sell their shares at a premium to the current market price. However, the acceptance can influence the control and ownership structure of the company being targeted.
- The process of a Tender Offer is highly regulated to ensure fairness. It includes mandatory disclosure of information, a specific deadline for shareholders to decide, and a requirement that the offer applies to all shareholders. These regulations are designed to protect minority and non-controlling shareholders.
Importance
A Tender Offer is important in the finance world as it represents a significant corporate financing mechanism that allows a company to strategically purchase, or buy back its own shares, or to acquire another company’s shares outright.
Tender Offers often represent a method by which acquiring companies can bypass management or the board of directors of the target company and speak directly to the shareholders.
This is particularly significant in situations where an acquisition is hostile or where the target company is not actively seeking to be sold.
Companies may also use Tender Offers as a method to reduce the number of outstanding shares, thereby increasing earnings per share and potentially boosting share prices.
Ultimately, Tender Offers can provide shareholders with a premium for their shares and an opportunity to evaluate the fairness of a proposal, making it an essential part of shareholder rights and corporate finance strategies.
Explanation
The primary purpose of a tender offer is to enable an acquiring company to acquire a substantial portion of the equity shares of a target company directly from its shareholders. This is particularly beneficial when the management of the target company is unwilling to agree to a merger or acquisition proposal.
In this case, the acquiring company may decide to proceed with a tender offer, which would allow it to bypass dealing directly with the target company’s management or Board of Directors. This can be an effective strategy for achieving a hostile takeover.
Additionally, a tender offer is used as an expedient strategy to gain control over another company without obtaining prior consent. In a structured tender offer, shareholders have the freedom to assess the merit of the offer and decide whether or not to sell their shares.
Some investors might find the proposition attractive, particularly if the offer price is above the current market price. Overall, a tender offer is a significant tool in the realm of corporate finance, often indicative of major corporate changes such as mergers, acquisitions, or other restructuring activities.
Examples of Tender Offer
Kraft Heinz’s Offer for Unilever: In 2017, Kraft Heinz made a $143 billion tender offer to acquire Unilever, a British-Dutch multinational company. The offer was made with the intention of creating a global consumer goods giant, but Unilever rejected the proposal stating that Kraft Heinz’s offer undervalued the company.
Microsoft’s Offer for Yahoo: In 2008, Microsoft made a public tender offer to acquire Yahoo for about $
6 billion. The move was intended to create a more competitive entity that could better take on Google in the digital advertising market. However, Yahoo rejected the offer, believing that the company’s value was underestimated.
Pfizer’s Offer for AstraZeneca: In 2014, U.S. pharmaceutical giant Pfizer made a tender offer to acquire British-Swedish multinational pharmaceutical company AstraZeneca for £69 billion. The proposed move aimed to boost Pfizer’s product line and lower its U.S. tax bill. However, AstraZeneca’s board rejected the offer, stating it undervalued the company.
FAQs about Tender Offer
What is a Tender Offer?
A Tender Offer is a formal, public proposal made by an entity such as a corporation or an individual investor, to buy a large number of shares from the stockholders of a public company. It specifies a fixed price, higher than the current market price, and sets a particular time limit the offer is valid within.
What are the reasons for a Tender Offer?
A Tender Offer is usually made when the acquiring company wants to take control or merge with the target company. It is an easy way for corporations to acquire a greater number of shares, without the need to go through the normative company board approval process.
What does the process of a Tender Offer involve?
The entity wanting to make a purchase starts with making a public announcement specifying the number of shares it wants to buy and the price it is willing to pay. The shareholders then can decide whether or not they want to sell. If the shareholder accepts the offer, they are said to tender their shares.
What advantages does a Tender Offer bring for shareholders?
A Tender Offer can provide shareholders with a higher price per share than what the stock is currently trading at in the market. Thus, it could lead to instant profits for shareholders, especially if the firm is undervalued or experiencing problems making its stock less attractive.
What are shareholder’s rights in a Tender Offer?
Shareholders have the right to accept or reject the offer. They also have the right to withdraw their shares from the offer until the time the offer ends. Furthermore, if the acquiring company ends up buying a higher percentage of the stock than initially planned, shareholders must be paid the same price for their shares.
Related Entrepreneurship Terms
- Proxy Fight
- Takeover Bid
- Shareholder Rights Plan
- White Knight
- Mergers and Acquisitions
Sources for More Information
- Investopedia – A comprehensive resource for investing and finance education.
- U.S. Securities and Exchange Commission (SEC) – The official website of the SEC provides a wide array of resources on securities law and financial regulations.
- Financial Times – A British international daily newspaper specialising in business and economic news.
- Bloomberg – A global information and technology company that delivers business and financial news, data, and insights.
