Tender Offer

What Is a Tender Offer?

A tender offer is a public invitation to shareholders to sell their shares to a buyer at a specified price within a set window of time. The buyer is often a company buying back its own stock, but it can also be an outside investor or another company seeking control of a target. Unlike a routine purchase on an stock exchange, a tender offer goes directly to shareholders and typically offers a premium above the current market price to encourage them to sell.

How It Works

The party making the offer publishes the terms, which usually include the price per share, the number of shares it wants to buy, the expiration date, and any conditions. Shareholders then decide whether to "tender" their shares, meaning they agree to sell on those terms. If the offer is oversubscribed, the buyer may purchase shares on a prorated basis. In the United States, tender offers are governed by federal securities rules, which require the offer to remain open for a minimum period and give shareholders the right to withdraw their shares before the deadline.

Why It Matters to Investors

For shareholders, a tender offer presents a choice: accept the offer and receive cash, often at a premium, or keep the shares and hold them. The offer price is usually compared with the current market price and the company's underlying value before a decision is made. A company repurchasing its own stock through a tender offer may also change its earnings per share and share count, which can affect valuation measures such as the price-to-earnings ratio.

Advantages and Disadvantages

Tender offers give shareholders a clear, time-limited opportunity to sell, sometimes at a higher price than the open market offers. They also let buyers acquire large blocks of shares quickly. On the other hand, the price may be below what the shares could later be worth, and shareholders who do not tender may find that the company's capital structure or ownership has changed in ways they did not expect.