Key takeaways:
- A tender offer is when an individual, group, or company asks shareholders to sell their shares, typically at a premium price.
- Tender offers can be used for stock buybacks, third-party acquisitions, or hostile takeovers.
- Private companies use tender offers to provide liquidity to employees and early investors.
What is a tender offer?
A tender offer is an open invitation asking shareholders to sell their company shares. Individuals, groups, or companies use this as a strategy to get control over a company or to consolidate ownership. The purchaser typically offers to buy the shares at a price higher than the current market price of the shares to entice shareholders to sell their shares.
We’ll go over different types of tender offers below. First, let’s dive into tendering.
What does it mean "to tender"?
In a financial context, to tender is to offer to sell your shares or securities back to the issuing company or another party under the purchaser’s specific conditions and price. In other words, to tender is to make your shares available for purchase.
During a tender offer, shareholders are invited “to tender" (meaning to agree to sell) their shares to the party making the offer at the price and under the conditions the purchaser is proposing.
Types of tender offers
Stock buybacks (Issuer tender offers)
As the name suggests, the stocks are being bought back. In this type, the company itself repurchases its own shares from existing shareholders.
The company often does this to consolidate ownership, support the share price, increase earnings per share, or return surplus cash to shareholders.
Stock buybacks can also help protect the company against hostile takeover attempts by reducing available shares in the market.
Third-party tender offers
This type of tender offer is typically used when a third party sees strategic value in acquiring a stake in the company, possibly because they believe the company is undervalued or for strategic alignment purposes. The offer is usually approved and facilitated by the target company's board.
Hostile takeover tender offers
A hostile takeover happens when a third-party goes against the company’s will and makes a direct appeal to shareholders. If successful, hostile takeovers can lead to significant changes in a company's strategic direction.
Tender offer vs. stock buyback
The main difference between a tender offer and a stock buyback is that the tender offer is a direct proposal to shareholders whereas a buyback happens by purchasing from the open market.
Let’s break it down even further:
As mentioned, tender offers usually offer a premium. Buybacks, on the other hand, typically occur at a market price.
Another difference is the timeframe. Tender offers have a fixed duration (usually at least 20 business days), while buybacks can be more flexible and ongoing.
Tender offers face stricter regulations and disclosure requirements compared to standard buybacks.
In a tender offer, shareholders actively decide whether to sell, while in a buyback, they may not even be aware the company is repurchasing shares. Both methods can be used to return value to shareholders, but tender offers are often used when a company wants to repurchase a large number of shares quickly or when attempting to take control of another company.
Debt tender offers
A debt tender offer is a process where a company offers to repurchase its outstanding debt securities, such as bonds, from its bondholders. Companies often use debt tender offers to refinance or restructure their existing debt.
How does a tender offer work?
Tender offer process
In general, the party making the tender offer, the buyer, publicly announces its intention to buy shares at a set price and under certain conditions, such as the percentage of shares required in order for the transaction to be completed. Because of regulatory compliance with the U.S. Securities and Exchange Commision (SEC), the offer is typically open for at least 20 business days.
If the conditions of the tender offer are met, the transaction is completed and the shareholders who decided to sell their shares receive payment. If conditions are not met, the offer may be withdrawn without obligation to purchase.
Offer date
The offer date is the day the tender offer is officially announced and made available to shareholders. From this date, shareholders can start deciding whether they want to sell their shares at the offered price.
Expiration date
The expiration date is the deadline for shareholders to decide if they want to accept the tender offer. After this date, no more shares can be sold under its terms.
Shareholder rights plan
Often called a "poison pill," a shareholder rights plan is a strategy used by companies to prevent hostile takeovers. It makes it more difficult or expensive for an outsider to acquire a large number of shares without board approval, protecting the company from unwanted takeovers.
Proxy contest
A proxy contest happens when an investor tries to gain control of a company by persuading other shareholders to vote for their proposed changes or board members. Note, this can happen alongside or instead of a tender offer.
Forward-looking statements
Forward-looking statements play an important role in tender offers because these provide context and information to shareholders about the potential future impacts of accepting or rejecting the offer.
Who makes these statements? Either the bidder, the company whose shares are being bought, or both. These statements are meant to convince shareholders to sell or keep their shares.
Why issue tender offers?
For public companies
Public companies issue tender offers primarily to gain control over a significant portion of their shares, often to consolidate ownership or fend off hostile takeovers. They can also use tender offers to manage their capital structure by buying back shares, which can help increase earnings per share and support the stock price.
For private companies
Private companies use tender offers to provide liquidity to shareholders, such as employees and early investors, who might otherwise have limited opportunities to sell their shares. This is especially useful when there is no imminent IPO or acquisition in sight, offering a way to realize some of shareholders’ investment's value.
Tax implications of tender offers
The tax implications of tender offers can vary significantly for both companies and shareholders and can be complex.
Here’s a simple breakdown:
Shareholders who sell their shares in a tender offer may be subject to capital gains tax or ordinary income tax, or they may be taxed at long-term capital gains rates.
For companies making the tender offer, purchasing shares is generally treated as a capital investment and is therefore not treated as an immediate tax-deductible expense. A company-led tender offer, however, is considered compensatory and might trigger income tax obligations for the company, instead of capital gains for participants.
Tender offer example
Stripe is a private tech company founded in 2010 whose core business is enabling businesses to accept online payments.
In 2023, Stripe conducted a tender offer to provide liquidity to its early employees who held restricted stock units (RSUs) that were set to expire. This tender offer allowed these employees to unlock the value of their equity without waiting for an IPO or acquisition, addressing the liquidity needs of long-time employees and early investors.
How to prepare your company for a tender offer
Decide who will buy the shares
Determine whether the shares will be bought back by the company itself (issuer buyback) or by external investors (third-party tender offer). This decision affects how the tender offer is structured and who will ultimately own the shares post-transaction.
Set a transaction price
Establish a fair price for the shares, often at a premium to incentivize shareholders to sell. The price should reflect current market conditions and align with any recent valuations, such as the 409A valuation for private companies.
Decide who will sell the shares
Identify which shareholders are eligible to participate, such as current employees, former employees, or early investors. Setting clear eligibility criteria helps manage the size of the transaction and its potential impact on company ownership and valuation.
Consider the tax implications
Evaluate the tax consequences for both the company and participating shareholders, including potential capital gains or ordinary income taxes. Proper tax planning can help mitigate unexpected liabilities and ensure compliance with relevant regulations.
Consider the impact to your 409A valuation
Understand how the tender offer might affect your company's 409A valuation, which determines the fair market value of your stock options. While a tender offer may increase this valuation, proper controls can help minimize any adverse effects on future option pricing.
Advantages and disadvantages of tender offers
Advantages
For the acquiring party, tender offers are quick (often completing the process in less than a month). Therefore, the acquirer can quickly accumulate a significant stake in the target company. Successfully completing a tender offer can result in gaining enough voting power to influence or control corporate policies and strategic directions.
For shareholders, selling their shares during a tender offer may be attractive, as the price offered is often higher than the current market value.
Disadvantages
While tender offers provide strategic advantages and liquidity opportunities, they also entail significant costs and complexities that must be carefully managed.
For the acquiring party, tender offers can be expensive due to regulatory compliance, legal fees, and the premium paid above market prices. The process can involve intricate regulatory requirements and potential risks such as hostile takeovers or shareholder resistance.
Another disadvantage for the acquiring party is limited participation. Not all shareholders may be eligible or willing to participate, and those who do might face restrictions on the number of shares they can sell, potentially limiting liquidity options.
Alternatives to tender offers
The secondary market
For private companies, an alternative to tender offers is the secondary market, which allows existing shareholders, such as employees or early investors, to sell their shares directly to private investors. This market operates outside the company's direct control, offering flexibility in terms of timing and pricing.
It provides liquidity without requiring the company to organize a formal tender offer. Shareholders can potentially find buyers willing to pay competitive prices, especially if there is high demand for the company's stock. Secondary sales can be complex and may require company approval. They often involve higher administrative costs and lack the price transparency found in public markets.
Option lending
Option lending is like getting a loan to buy your company's shares, with the hope that those shares will be worth more in the future when you can easily sell them.
FAQs about tender offers
What is the purpose of a tender offer?
The purpose of a tender offer is to allow a company or investor to purchase a significant number of shares from shareholders, often to gain control of the company or consolidate ownership. It provides liquidity to shareholders by offering to buy their shares at a premium over the market price.
What happens if you do not accept a tender offer?
If you do not accept a tender offer, your shares remain in your possession, and you continue to hold them as before. However, if the company goes private or changes significantly due to the tender offer, your shares might become less liquid and harder to sell in the future.
What are the disadvantages of a tender offer?
Tender offers can be costly due to regulatory filing fees, legal costs, and potentially higher per-share costs. They also involve regulatory hurdles and may fail if not enough shareholders participate, leading to wasted time and resources.
Are tender offers hostile?
Tender offers can be hostile if they are made directly to shareholders without the approval of the company's board of directors. This type of offer is often used in hostile takeover attempts when the board opposes the acquisition.
How long must a tender offer last?
According to SEC regulations, a tender offer must stay open for at least 20 business days, allowing shareholders ample time to consider the offer and decide whether to participate.
Can a tender offer be terminated?
Yes, a tender offer can be terminated if certain conditions are not met. Typically tender offers are terminated when the number of specified shares isn’t met. The bidder may also withdraw the offer if unforeseen circumstances arise that affect their ability or willingness to complete the purchase.
Wrap-up
Tender offers can be used for several reasons including stock buybacks, third-party acquisitions, or hostile takeovers. Public companies issue tender offers primarily to gain control over a significant portion of their shares and private companies typically use tender offers to provide liquidity to employees and early investors.
Now that you are familiar with the ins and outs of tender offers, read other news, tips, and guides for finance teams on Rho’s blog.
Isabel Peña Alfaro is a guest contributor. The views expressed are hers and do not necessarily reflect the views of Rho.
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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.