In stock market terms, a tender offer is a public offer to buy a company’s shares which is made by a person or entity to the company’s existing shareholders. The person or entity making a tender offer normally aims to gain control of the company. For that reason, a tender offer is only valid if enough shareholders are interested in accepting the offer and selling their shares.
The terms and conditions of the offer determine how long it is valid and the price at which the securities have to be sold. Normally, the price offered is notably higher than the share’s actual market value. By offering an above-market price, the person or entity making the tender offer aims to motivate shareholders to sell their shares.
Example: An investor owns 10 percent of a company. They want to gain a controlling stake in the company, for which they need to own at least 50 percent of its shares. The company has a total of 1 million shares, each of which have a value of 20 francs. The investor makes a tender offer to all of the company’s shareholders. They are willing to buy 400,001 shares for 25 francs each – 25 percent above the market value. In exchange for this premium, the investor seeks to gain the opportunity to buy enough shares in the company to give them a controlling stake of more than 50 percent.
The term tender in the term indicates that the prospective buyer is making an open offer to shareholders to buy their shares at a certain price. The takeover can only happen if enough shareholders agree to the sale. So a tender offer is an offer to buy shares, if their owners are willing to sell them.
Once a tender offer has been made, the stock’s price generally lingers at the price paid, or slightly under it. Often, the price of a company’s stock climbs when a tender offer is announced. If you only buy the company’s stock after the announcement has been made, you generally will not be able to profit much from the price hike because the offer has already been accounted for in the market price. The reason why the price often lingers just below the offered price is that there is no sure way to know whether or not the offer will be accepted. If a company’s stock does not climb or even loses value after a tender offer has been made, this indicates that the company’s shareholders do not expect the takeover to happen.
A tender offer can be made by one or multiple people, or by companies. A company can also make a tender offer for its own shares (as part of a share buyback program, for example). In this case, the company offers to buy its own shares from its shareholders at a certain price.
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