What Is Tender?
A tender, in finance, refers to a public, formal invitation to submit a bid or an offer. Most commonly, a tender offer is a type of public takeover bid in corporate finance where an acquiring party proposes to buy some or all of a target company's outstanding shares directly from its existing shareholders within a specified timeframe and at a predetermined price. This price is typically set at a premium over the target company's prevailing market price to incentivize shareholders to sell. Tender offers are a significant mechanism in merger and acquisition strategies, allowing a bidder to gain a controlling interest or even full ownership of a company.
History and Origin
While the concept of directly soliciting shareholders for shares has roots earlier in the 20th century, the modern cash tender offer, as a dominant method for acquiring corporate control, gained prominence in the mid-1950s. Academic research indicates that the earliest hostile cash tender offer can be traced back to 1944.6 Prior to this, acquiring control often involved open-market purchases of equity or share-exchange offers. The shift towards cash tender offers was influenced by changes in share ownership patterns and reduced opportunities for bidders to manipulate the stock price of target companies.5 The proliferation of these direct solicitations eventually led to the enactment of the Williams Act in the United States in 1968, which introduced regulations to protect shareholders by mandating disclosures and ensuring fair treatment in tender offers.
Key Takeaways
- A tender offer is a direct solicitation to a company's shareholders to sell their shares at a specified price and time.
- The offer price usually includes a premium over the current market price to attract shareholder participation.
- Tender offers are a common strategy for corporate acquisitions and can be conditional on receiving a minimum number of shares.
- Regulatory bodies, such as the SEC in the U.S., oversee tender offers to protect investors.
- Beyond corporate control, "tender" can also refer to formal bids for contracts or offers to repurchase debt securities.
Interpreting the Tender
When a tender offer is made, shareholders of the target company must evaluate the offer's terms. The primary consideration is the offered price relative to the current market price and the potential for future share value appreciation if the company remains independent. Shareholders also consider the offer's conditions, such as the minimum number of shares required for the tender offer to be successful. If the bidder seeks a controlling interest, shareholders must weigh the implications of new management on the company's future prospects and their remaining securities. The success of a tender offer depends on a sufficient number of shareholders tendering their shares, demonstrating their acceptance of the proposed terms.
Hypothetical Example
Imagine "GreenTech Innovations Inc." (GTI) is a publicly traded company with its stock trading at $50 per share. "MegaCorp Holdings," a larger competitor, decides it wants to acquire GTI to expand its market presence. Instead of negotiating directly with GTI's board for a merger, MegaCorp launches a tender offer.
MegaCorp announces a public offer to all GTI shareholders to purchase their shares for $60 each. This represents a 20% premium over the current market price of $50. The offer is conditional on MegaCorp acquiring at least 51% of GTI's outstanding shares to gain a controlling interest. The tender offer is set to expire in 20 business days.
GTI shareholders must now decide whether to "tender" their shares, meaning they formally agree to sell them to MegaCorp under the stated terms. If enough shareholders, including large institutional investors, tender their shares to meet the 51% threshold, MegaCorp will proceed with the purchase, and the tender offer will be successful. Shareholders who tender their shares will receive $60 per share, realizing an immediate profit. If fewer than 51% of shares are tendered, MegaCorp may choose to extend the offer, raise the price, or withdraw the tender offer entirely.
Practical Applications
Tender offers are predominantly used in the following financial scenarios:
- Corporate Acquisitions and Takeovers: This is the most common application, where a bidding company directly approaches the shareholders of a target company to gain control. This method can be used in both friendly and hostile takeover attempts.
- Issuer Tender Offers: A company may itself initiate a tender offer to repurchase its own shares from the market. This is often done to reduce the number of outstanding shares, which can increase earnings per share, or to prevent a hostile takeover. For example, in 2018, Thomson Reuters announced a substantial issuer bid/tender offer to repurchase up to US$9 billion of its common shares.4
- Debt Tender Offers: Companies can also launch tender offers for their outstanding debt securities, such as bonds. This is typically done to refinance debt at lower interest rates, manage debt maturity profiles, or reduce overall debt obligations.
- Government and Public Sector Bids: In a broader sense, "tender" also refers to the process where governments or large organizations solicit bids for large projects or contracts (e.g., a construction tender, a tender for IT services). While not directly a corporate finance tender offer for securities, it shares the common element of a formal solicitation process.
In the United States, all third-party tender offers that would result in more than 5% ownership of a class of a company's securities require the bidder to file a Schedule TO with the U.S. Securities and Exchange Commission (SEC). This filing mandates disclosure of key information about the offer, including its terms and the bidder's identity.3
Limitations and Criticisms
While tender offers can be efficient means of corporate control transfer, they are not without limitations and criticisms.
One major criticism revolves around the potential for coercive elements, especially in certain types of tender offers (e.g., two-tiered offers) where shareholders might feel pressured to tender their shares even if they believe the offer price is too low, for fear of being left with illiquid or devalued shares in a minority position.2
Another limitation can be the high cost for the acquirer, given the necessity of offering a premium over the market price to entice shareholders. Furthermore, target company management can employ various defensive tactics, such as a proxy fight or a "poison pill," to thwart a tender offer, increasing the cost and complexity for the bidder. Some academic studies suggest that shareholders of target companies may lose value when management successfully defeats tender offers.1 The complexities of corporate governance and the often extensive due diligence required for a successful acquisition also present challenges.
Tender vs. Bid
While "tender" and "bid" are often used interchangeably in general contexts, in finance, particularly concerning corporate control, they have distinct applications.
| Feature | Tender | Bid |
|---|---|---|
| Definition | A formal public offer, often by an acquirer, to buy shares directly from all existing shareholders at a specific price within a set period. | A general offer or quotation for a price. In markets, it's the price a buyer is willing to pay for a security or asset. In a broader sense, it's a proposal to undertake a project or provide services. |
| Context | Primarily used in mergers and acquisitions for corporate control (tender offer for shares), or for a company to repurchase its own financial instruments. | Applies broadly: stock market (bid price), auctions, procurement (contract bid), or general offers. |
| Target | Specific securities (e.g., shares or bonds) of a company, directly from all holders. | Can be for anything from a single share on an exchange to a complex project contract. |
| Formality | Highly formalized, regulated process (e.g., requiring SEC filings like Schedule TO) with specific timelines and conditions. | Can be informal or formal depending on the context (e.g., a verbal bid for an antique, or a formal procurement bid). |
A tender offer is a specific type of public solicitation or "bid" for shares designed to gain valuation or control, whereas "bid" is a broader term encompassing any offer to buy or undertake something.
FAQs
What is the primary purpose of a tender offer?
The primary purpose of a tender offer is typically for an acquiring entity to gain a controlling interest or full ownership of a target company by directly soliciting its shareholders to sell their shares. It's a common strategy in the realm of leveraged buyout activities and corporate acquisitions.
How does a tender offer differ from buying shares on the open market?
In an open-market purchase, an investor buys shares through a stock exchange at the prevailing market price. In contrast, a tender offer is a direct solicitation to all shareholders at a pre-set price, usually at a premium, for a specific number of shares within a defined period, often with the intent of gaining control.
Are tender offers always hostile?
No, tender offers are not always hostile. While they are a common tool in hostile takeover attempts where the target company's management resists the acquisition, they can also be friendly. In a friendly tender offer, the target company's board of directors may recommend that shareholders accept the offer.
What happens if not enough shares are tendered in a tender offer?
If the conditions of a tender offer are not met—for example, if the minimum number of shares is not tendered—the offeror typically has several options. They may extend the deadline, increase the offer price to make it more attractive, waive certain conditions if permissible, or withdraw the offer entirely. If the offer is withdrawn, the tendered shares are returned to the shareholders.