What Is a Tender Offer?

If you own stocks, you’re no doubt familiar with a well-known way to buy or sell them: on a stock exchange, via a middleman known as a broker, who helps match up buyers and sellers.

But there are other ways to buy and sell shares, one of which is a tender offer. In a tender offer, the investor or company looking to buy shares makes an offer to a group of people (all shareholders or those in a certain class) to buy their shares at a specific price. The price is usually higher than the price on the open market, to persuade owners to sell, and it can come with conditions that have to be met for the sales to go through.

There are several different reasons and scenarios when someone might make this kind of stock buyout offer, and they can apply to shares in both public and private companies.

HOW A TENDER OFFER FOR STOCK WORKS

THE OFFER ANNOUNCEMENT

A tender offer for a public company is typically published in a major national newspaper like The Wall Street Journal or The New York Times. In addition, the announcement will be mailed to existing owners of the shares. The announcement will include:

• The offered price per share
• The expiration date of the offer
• The number of shares the offeror is seeking and other conditions of the offer

The requirements for a private company tender offer are not as tightly regulated, but enough information must be provided for shareholders to make a decision.

SHAREHOLDER DECISION PERIOD

The tender offer must be open for at least 20 business days following the offer date (the date it was published and/or mailed to shareholders). During the time period that the offer is open, each individual shareholder has to decide whether to sell (tender) any or all of their shares.

Once they’ve made a decision, they respond to the offer. As a shareholder who has agreed to the tender offer, you can withdraw that agreement at any point the tender offer is open.

If more shares are offered than the offeror was looking to buy (which is known as being “oversubscribed”), they’re not obligated to buy them all. Instead, they will likely buy a prorated amount from each shareholder who accepted the offer. For example, if twice as many shares were offered as the offeror wanted to buy, they will buy 50% of each shareholder’s offered shares.

COMPLETION OR WITHDRAWAL

If the conditions set by the offeror aren’t met, they may withdraw the tender offer after it expires, meaning no one’s shares will be purchased.

If all conditions are met, the offeror will purchase tendered shares at the agreed price on the established date.

WHY COMPANIES OR INVESTORS MAKE TENDER OFFERS

Tender offers may be made by the company who issues the shares themselves, or by a third party.

Companies may make tender offers for their own shares:

• To take the company private (meaning it has a limited number of owners and is no longer listed on a stock exchange)
• To increase the company’s ownership stake so it can streamline management and decision-making
• To allow employees of or investors in private companies who hold stock and stock options to cash in and increase their liquidity

Third parties may make tender offers for a company’s shares:

• To gain ownership of the company (for instance, when the company’s board of directors will not agree to a sale)
• To gain enough equity in the company to have a say in how it’s being run

TYPES OF TENDER OFFERS

PUBLIC COMPANY TENDER OFFERS

Public company stock can be bought on an exchange, and without having to pay a premium, so tender offers are usually related to a third party trying to wrest control by consolidating ownership of a large stake in the company. That could happen either because they want to buy the company (but it won’t agree to be sold) or because they want to make meaningful change in the way it’s run.

In some cases, a public company may make a tender offer for its own shares because it wants to retake the company private. That could be the case if it wants to eliminate the requirement to comply with investment regulations or the pressure, scrutiny and control of shareholders.

PRIVATE COMPANY TENDER OFFERS

Tender offers can be common for certain types of private companies, like those that are backed by venture capital or startups preparing to go public. In cases like these, employees can’t easily sell their shares, because the company isn’t traded on the open market. So, a tender offer gives them a rare chance to “cash in,” while it gives the VC firm or company itself the ability to consolidate their ownership.

Sometimes, a third party is the offeror for a private company tender offer, letting new investors purchase equity in a company that’s not public yet.

VOLUNTARY VS MANDATORY TENDER OFFERS

Tender offers in the U.S. are all voluntary on the part of the offeror. Many other countries have mandatory tender offers that are triggered under certain conditions to protect small shareholders.

TENDER OFFER VS SHARE BUYBACK

Tender offers are sometimes confused with share buybacks, because they can each involve a company buying its own shares. But they’re different in several ways:

WHAT SHAREHOLDERS SHOULD CONSIDER BEFORE ACCEPTING A TENDER OFFER

If you’ve received a tender offer, here are some of the things you’ll want to think about:

•  The offer price relative to current valuation and potential future valuation
• The tax implications of selling (more on that below)
• The effect to your overall portfolio diversification if you choose to sell or not
• Whether you have a current or upcoming need for cash, especially if the tender offer is for a private company

If you’re an employee of the company, you have some additional considerations:

• If you own stock options as opposed to stock, you should consider the type of options, as they’ll be treated quite differently from a tax perspective. Accepting the tender offer and selling could also help you avoid alternative minimum tax, which is applied to some kinds of stock options even if they haven’t been exercised yet.
• You’ll also want to consider your future with the company, as your options may become worthless if you leave. The same applies if you hold stock options that have an approaching expiration date.
• You should find out whether the tender offer is structured in a way where it’s considered “compensatory,” in which case part of your gains may be taxed as income even if it would otherwise be eligible for preferential long-term capital gains treatment.
• Consider what you think your company’s future is. Accepting a tender offer means you know exactly what you’ll get for your shares. If your company is heading for a sale or an IPO, the value of your shares is much fuzzier.

TAX CONSIDERATIONS OF A TENDER OFFER

If you’re an ordinary stockholder participating in a tender offer and the sale is completed, your potential gains are usually treated the same as any other sale from a tax perspective, and you may have extra-large gains if the premium for the shares was substantial.

Remember that any gains for shares you held less than one year will be considered short-term gains and taxed as ordinary income. Long-term gains will have preferential rates.

Tender offers from an employer to employees, especially those that involve stock options, can have a much more complicated tax treatment. Whether profit is taxed like ordinary income, long-term gains or short-term gains depends on a number of factors.

Additionally, watch out for alternative minimum tax implications and state taxes that may be due.

RISKS AND CONSIDERATIONS

Selling your shares at a premium to the current market price may be attractive to you. Keep in mind that the offeror clearly feels that the price they’re offering is worth it. If you hold onto your shares instead and the tender offer goes through, the value of the company might be even higher in the future.

In addition, you should consider tax implications and, if you’re an employee of the company that issues the shares, your potential opportunity to sell and increase your portfolio diversification. If it’s a private company, this may also be an opportunity to increase your liquidity that might not come around again anytime soon.

And always keep in mind that the tender offer might not close the way you think. If the number of shares offered aren't enough for the offeror, it could be withdrawn; if too many shares are offered, you may not be able to sell as many as you wanted.

HOW A FINANCIAL ADVISOR CAN HELP EVALUATE A TENDER OFFER

If you receive a tender offer, a financial advisor and tax professional can help you understand the offer and make an informed decision. For example, they can help by:

• Evaluating the impact to your liquidity, especially if the offer is from a private company
• Reviewing the tax implications, which can be especially complicated if the offer is from your employer and involves stock options
• Assessing the diversification impact to your overall portfolio
• Coordinating with your CPA or equity compensation specialist to help you make a decision that’s aligned with your overall financial plan.

Receiving a tender offer can be a valuable opportunity. Be sure to understand your options so your decision can support your long-term financial goals.