Tender offer: Overview, definition, and example
What is a tender offer?
A tender offer is a public, open offer made by a company (or an individual) to purchase some or all of the outstanding shares of another company at a specified price, usually at a premium over the current market price. Tender offers are typically made to shareholders of a company in an effort to gain control, acquire the company, or influence corporate decisions. The offer is made directly to shareholders, bypassing the company's management. Tender offers may be friendly, where the company being targeted agrees to the offer, or hostile, where the company does not consent and may attempt to block the offer.
For example, a company may launch a tender offer to buy back its shares from investors or to acquire a competitor by offering shareholders of the target company a higher price than the current market value of their shares.
Why is a tender offer important?
A tender offer is important because it represents a strategic move for a company looking to consolidate ownership, acquire another company, or reorganize its shareholding structure. For the company making the offer, it provides an opportunity to gain more control over the target company or secure a financial position by repurchasing shares. For shareholders, tender offers can provide an opportunity to sell their shares at a premium price.
In some cases, a tender offer is used as a tool in mergers and acquisitions (M&A) to either gain approval from shareholders or gain control without management’s consent. The outcome of a tender offer can significantly affect the stock price, shareholder value, and the control structure of the company.
Understanding a tender offer through an example
Imagine Company A, a large corporation, wants to acquire Company B. Company A makes a tender offer to buy 100% of Company B's shares from its shareholders at a 20% premium over the current market price. If Company B’s shareholders accept the offer and sell their shares, Company A will gain control of Company B. If enough shareholders agree, the tender offer can successfully lead to an acquisition.
In another example, a company might make a tender offer to buy back some of its outstanding shares from the market. By offering a higher price than the current market price, the company incentivizes shareholders to sell their shares, helping the company reduce the number of shares in circulation, which can increase the value of remaining shares.
An example of a tender offer clause
Here’s how a tender offer clause might look in an agreement:
"The Purchaser hereby offers to purchase up to 1,000,000 shares of the Company’s common stock at a price of $25 per share. The offer shall remain open for 30 days from the date of this announcement, and shareholders wishing to tender their shares must submit their acceptance in writing within this period."
Conclusion
A tender offer is an essential tool used in mergers, acquisitions, or capital restructuring to purchase shares from the shareholders of a company, often at a premium price. Tender offers allow companies to gain control or reduce the number of shares in circulation, and they offer shareholders an opportunity to sell their shares at favorable terms. Understanding how tender offers work is important for both businesses and investors in navigating corporate transactions and opportunities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.