A tender offer is a business transaction that is an essential term to know as an investor or business owner. Tender offers can occur due to many different reasons.
Do you know if tender offers are good or bad? In this article, you will learn everything you need to know about tender offers.
What is a tender offer?
Tender offers are a type of business transaction in which one company makes an offer to purchase all or some of the outstanding shares of another company. The offeror (the company making the offer) is known as the bidder, and the target company is known as the offeree.
Tender offers can include various methods like cash, securities, or other assets, or a combination of these.
Why is it called a tender offer?
A Tender Offer is called 'Tender' because 'Tender' has the meaning of offering. The offer can be in cash, shares, or a combination of both. Tender Offers are made to the target company's shareholders. Tender Offers are also called takeovers and they can either be friendly or hostile.
Who makes tender offers?
Typically, only large companies make tender offers, as they have the financial resources necessary to complete the transaction. There are several reasons why a large company would make this type of offer.
Why do companies make tender offers?
The main reason is that they see the target company as a good business that is either fairly valued or undervalued. The goal of the acquirer can be to integrate the companies either vertically or horizontalçly.
The companies can also be similar, and combining both operations could lead to synergies which in turn reduces costs, and improves margins.
The strategic reason for a tender offer
A tender offer is a type of acquisition strategy in which a company, investor, or group of investors publicly announces its intention to buy a certain number of shares from shareholders at a price above the current market value.
When is a tender offer used?
A tender offer is typically used when the bidder already owns some of the target's stock and wants to buy out other shareholders. Even at a price above the current market value to gain voting rights.
Tender offers can also be used when the bidder does not already own any shares of the target company but believes in the value of that company. The company making the offer might make an offer to the target company when it is undervalued and they want to take advantage of this.
They can also be used for a variety of reasons relating to the type of tender offer mentioned above.
Is a tender offer good or bad?
There is no one definitive answer to this question as the effects of a tender offer will vary depending on the particular circumstances. A tender offer can be seen as either good or bad, depending on the perspective of the person making the offer, and the offered price.
It will ultimately depend on the value of the company, and if the offer is above that value or under.
How tender offers are good
From the standpoint of the person making the offer, a tender offer may be a good strategy for increasing their control over a company. For current shareholders of the company, it is also a great opportunity to sell their shares at a higher price than the current market value.
Broadly speaking tender offers represent that either investors or corporations attribute a certain value to the company, which is good. However, depending on the price of the offer and the overall value of the company the offer might be good if it is above the fair valuation of the company.
Why tender offers might be bad
On the other hand, a tender offer can be bad for the shareholders of the company being acquired. This is because tendering their shares may not be in the best interest of the shareholders.
Especially if the offer is made at a price below the fair valuation of the company. Additionally, tender offers can be disruptive to a company's operations and may lead to job losses. It can also create a dispute between shareholders with opposing views on whether to accept or decline the tender offer.
Types of tender offers
Although most tender offers tend to be friendly, things can get complicated and turn into a hostile takeover. This is because tender offers are a complex process. On one side we have the acquirer, the company’s management, the investors, and the employees. Tender offers also vary depending on the specific circumstances. Here are the main types of tender offers:
- Friendly offer
- Hostile takeover
- Self-tender offer
- Voluntary offer
- Creeping offer
- Mandatory offer
- Exclusionary tender offer
- Mini-tender offer
- Partial tender offer
- Two-tier tender offer
Friendly offer
The offer is considered friendly when the Board of Directors recommends that shareholders accept the offer and sell their stock.
When a bid for the target company's outstanding shares is made, the board of directors typically learns about it. They may also advise their investors on whether or not to tender their shares.
Hostile takeover
If the company making the offer does not notify the Board of the target company about the bid. Or if members of the board believe that the offer is not in the best interest of the shareholders, it's considered a hostile takeover.
In this case, the target company may try to resist the takeover with a self-tender offer. These are the two most well-known types of tender offers, but here is a brief explanation of other tender business transactions.
Self-tender
More commonly known as a share buy-back. It's used in an attempt to buy their shares so that a hostile company cannot.
Self-tender is mostly used when there is a hostile takeover, and in order to prevent shareholders from selling the company itself matches the offer, or even offers a better price than the acquirer.
Voluntary offer
This is when a company volunteers to make an offer.
Creeping offer
This can often be done in preparation for a hostile takeover. The company looking to make a hostile takeover will buy shares of the company on an exchange. They will do this in smaller amounts, allowing them to gain more equity in a publicly-traded company without drawing attention to the takeover.
Mandatory offer
A mandatory offer is an offer for the purchase of 100% of a company’s shares to gain voting rights in the company's operations.
Exclusionary tender
An exclusionary tender involves offering to purchase shares owned by certain investors. This type of tender offer is forbidden since it would be unfair to other shareholders of the company.
Mini-tender
A high-risk offer to purchase no more than 5% of a company's stock. This is not disclosed as there is no legal reason to share the purpose of this strategy. The intentions of the offer are often mysterious. Oftentimes the goal is to make the stock price move closer to the offered price.
Partial tender
An offering to buy only some of the shares of the company. Interested shareholders could participate and sell their shares at the agreed price.
Two-tier
A two-tier tender offer has the goal of acquiring more than 50% of the company’s voting rights through a tender offer initially. Once they gain control of the voting rights another offer will be made in order to purchase the remaining shares.
Both sides of the tender offer
As with most things in business, there is no black and white answer when it comes to the question of whether or not a tender offer is good or bad.
Tender offers are simply one tool available to corporate managers, or investors who want to gain control over a company. It can be good for the shareholders of both companies, or they can be bad if they result in the loss of jobs and other negative effects for employees.
Tender offers can be good or bad depending upon the perspective from which they are viewed. While tender offers can be beneficial for companies seeking to increase their ownership stake in another company, they can also be risky if the offer pricing is too aggressive or if there are not enough willing sellers.
As such, it's important for companies considering making a tender offer to understand all the potential risks and benefits involved.
Risks of making a tender offer
Making a tender offer is one of the riskiest things that a company can do. Tender offers have costs, and they always involve some risk that the offer will not be accepted by enough shareholders.
If a company makes an offer for too many shares, it may end up owning too much of the company and may have to pay a premium for the shares it acquires. This can be a loss if they are only seeking to do a partial tender offer.
Tender offers also present a risk to target companies. Tender offers are always disruptive, and they can create a hostile environment that makes it difficult for the company to go forward with its business.
It can also lead to lawsuits, which are costly and time-consuming. Tender offers are always risky, so companies should only make them if they are sure that they will be successful. Tender offers should never be made without careful consideration of all the pros and cons.
What is the difference between a merger and a tender offer?
A merger is an acquisition in which two companies agree to combine their businesses. In contrast, a tender offer is an acquisition in which one company makes an offer to purchase all of the outstanding shares of another company.
The key difference between a merger and a tender offer is that a merger is an agreement between two companies to combine their businesses, while a tender offer is an offer from one company to buy some or all of the shares of another company.
Conclusion
Business transactions occur not just between companies and customers. They can occur with transactions to gain control of another company or more control of their own. This can be a strategic move to buy competitors out of a competitive market, acquire their assets, or a combination of various business strategies.
If done right, it can be good for the acquirer, target company, employees, and even shareholders. There are often risks involved but the payoff can be worth it. Tender offers are a big decision with high costs.
The correct type of tender offer for the situation is critical in the success of the business strategy. Tender offers are generally not the best way to take over a company, as there are a lot of associations with hostilities and negative disruptions.
However, they are helpful in the right situations. Tender offers are most useful when a company is undervalued or the acquisition could be beneficial in some way.
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