Advantages of Tender Offers over Open Market Purchases
It is one of the biggest questions in the world of stocks and trades – what are the advantages of tender offers over open market? If so, what will it cost? Is there a higher success rate? Which one will cost me less and earn me more?
There are different types of tender offers in the corporate world, but that is another topic to discuss for another day. Today, we discuss the advantages of tender offers over open market purchases.
At first glance, it may seem like open market purchases provide more advantages as opposed to tender offers. For instance, open market purchases do not usually involve complicated legal requirements and costs that are often associated with tender offers.
This means that the bidder must be concerned that the open market purchases will be legally interpreted as a tender offer. However, there is more to this than meets the eye. You need a certain understanding of the difference between tender offers and open market purchases.
Yes, the costs of a tender offer may seem to be far higher than those brokerage fees that are incurred when it comes to attempting to take control through open market purchases of the target’s stock. It was previously estimated that the total cost of tender offers averages at approximately 13% of the post-tender offer market price of the target’s shares.
Additionally, there are certain drawbacks to open market purchases that are not usually in tender offers. Let us take a bidder for example. The said bidder purchases shares in the open market. He is not guaranteed that he will be able to accumulate a sufficient amount of shares to acquire clear control.
This can mean that if 51% of the clear control position is not achieved by the bidder, there is a possibility that he will become stuck in an undesirable minority position. If he is looking to acquire control, then he certainly does not want a minority position only.
On the other hand, a tender offer has a distinct advantage. One of these advantages is that the said bidder is not bound to purchase the tendered shares with the exception that the desired number of shares has already been tendered.
So, in this position, what should the bidder choose? Well, the bidder who becomes mired in a minority position can use the following alternatives instead:
Tender Offers for Additional Shares
The advantages of tender offers over open market purchases will give you options. The first option is to do a tender offer for additional shares. In cases like these, the bidder incurs the tender offer expenses. In addition to that, the bidder should also incur the costs of the open market purchasing program.
Proxy Fight
The second option would be to begin a proxy flight. Once again, this is another costly means of acquiring control. However, the silver lining is that after the bidder has already acquired a large voting position, he is now in a stronger position to launch a proxy fight. It may be a costly option, but it gets the job done.
Another option would be to sell the minority stock position. The sales of the minority stock position would cause significant downward pressure on the stock price. This means that it could result in significant losses for a company.
An additional drawback to open market purchases, especially the large-scale ones, is that it is very difficult to keep private. There are a lot of market participants who watch the stock purchases and regards it as a signal that the bidder may be attempting to make a raid on the target.
As a result, this may then change the shape of the target’s supply curve for its stock by making it more vertical above some price. Yes, this strategy can make a street sweep effective, however, it can be more costly and expensive.
In addition to that, the other shareholders may also have the idea that a higher price may be forthcoming. This can make the other shareholders even more reluctant to sell. That is, of course, unless a very attractive offer is made to them.
This threshold price may be reached quickly and swiftly achieved as the available supply of shares on the market, which may be relatively small in comparison with the total shares outstanding, becomes exhausted. Furthermore, stockholders can sense these things coming. As they come to believe that a bid may be forthcoming, they have the luxury and incentive to hold out for a higher premium.
This type of holdout problem does not exist in tender offers. Why do you ask? This is because the bidder is not obligated to purchase any shares yet. That is unless that amount requested has been tendered.
If the requested amount has not been tendered at the end of the expiration date of the offer, the bidder can simply choose to either cancel the offer or extend it. Additionally, a street sweep may be more effective when a bidder has the ability to locate large blocks of the stack in the hands of a small group of investors.
Other Options
It is a well-known fact that in cases in which there have been offers for the company or any speculation of an impending offer, the stock often becomes concentrated in the hands of arbitrageurs. And while these investors are often too eager to sell, they will often only do so at a higher price. That is just the way it works.
The existence of large blocks of stock in the hands of arbitrageurs may enable the bidder to acquire a significant percentage of a target’s stock. In some cases, the bidder can acquire enough percentage of the stock to gain effective control of the company. However, this only happens if the bidder is willing to pay a possibly painful dip in his pocket. More often than not, the costs of this method of acquisition are prohibitively expensive.
Now that you have these facts and the advantages of a tender offer versus open market purchases, it will become easier for you to make large business decisions in the future. Hopefully, the ideas, facts, and examples presented in this article help you make large and significant business decisions you may face in the future.
Tender Offers vs. Long-Form Merger
Until August 2013, there have been two ways to acquire a public target, through a tender offer or through a long-form merger. The former has to do with a two-step transaction, while the latter is a statutory merger that requires the target’s shareholder vote in order to approve the deal.
If you’re planning to acquire a US company, this article shall help you by elaborating the difference between the two means
Tender Offers
It is ironic how the Williams Act, the key piece of federal legislation on the regulation of tender offers, does not even define the term. This vagueness led to cases of confusion about what constitutes a tender offer.
Basically, it is an open offer by a prospect to all stockholders of a publicly traded corporation to tender their stock for sale at a specific price and time. Usually, the acquirer’s offer is higher than the market price to induce the shareholder.
8 Characteristics of a Tender Offer
- Active and widespread solicitation of public shareholders for the shares of an issuer
- Solicitation made for the substantial percentage of an issuer’s stock
- Offer to purchase made a premium over the prevailing market price
- Terms of the offer firm rather than negotiated
- Offer contingent on the tender of a fixed number of shares, often subject to a fixed maximum number to be purchased
- Offer open only a limited period of time
- Offeree subject to pressure to sell his stock
- Public announcements of a purchasing program concerning the target company precede or accompany the rapid accumulation of larger amounts of the target company’s securities
Unlike the long-form merger, the tender offer is more complex. However, the process is relatively quicker since the bidder may be able to acquire control in 20-40 business days. Here, the buyer can bypass the management and the board of directors directly. Still, the purchase is a friendly transaction in which there are a few shareholders, accelerating the process by avoiding the otherwise required management vote.
The downside of tender offers is that the acquirer must convince 100% of the shareholders to sell their stocks in order to gain full control of a company.
Long-Form Merger
Another basic way for the bidder to acquire a company is through the long-form merger. Here, the acquirer seeks 100% ownership through a transaction where it wins the approval of shareholders on taking over the sale of shares.
One advantage of the long-form merger is that it is assured since it is agreed upon, involving additional filing and disclosure requirements.
The only drawback of this method is that it takes two to four months before the bidder achieves full control. This is because it’s more systematized and it needs approval by the SEC
Read also: Friendly Mergers vs. Hostile Deals; Type of Merger: Short-Form Merger
Conclusion
Every acquisition must be thoroughly analyzed first in order to know what strategy will work best for him or her. This includes a review of publicly available documents and a written summary of salient legal issues.
To be fair, the long-form merger has more distinct advantages than the other such as cooperation between the management of the two parties, faster closing, and reduce costs.
However, depending on the situation, a tender offer may be quicker but can only be pursued if the bidder understands the complexity and risk, and if he or she believes negotiation will be futile or alternatives have been exhausted.