- What are tender offers and why should you love them?
- What are the two major types of tender offers?
- What makes the tender offer low risk?
- What are some tips and tricks?
- When do you get paid?
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What are tender offers and why should you love them?
Tender offers (and the often-similar “take privates”) provide one of the easiest, lowest-risk ways to make money in the stock market. In a tender offer, a company offers to buy its own stock, either for a specified price or on a sliding scale. The offer has a limited duration, often just a month or so, though sometimes longer, and so there’s a fixed amount of time you need to be invested in the stock.
The upside is low risk; the downside is low total return, though the annualized return on tenders is usually quite high. Sometimes you may be able to earn as much as 10% on your money in a month. Still, you can easily pocket $100-150 (sometimes more) for just clicking the mouse a few times.
There’s another benefit: tender offers often have a mechanism to lock out big players, keeping tender offers – of a specific type that I explain below – inefficiently priced, meaning easy profits for the little guys. It’s really that easy: park your money for a month, and the company will provide you a fat return. Back to the top.
What are the two major types of tender offers?
Some tenders provide a sliding scale for payment in which the stockholder specifies an asking price within the company’s given range. For example, XYZ Company conducts a $10 million tender offer at a price range of $19-$21. As someone who wants to participate, you contact your broker and offer your shares and name your price in that range. XYZ will aggregate all the orders, figure out who has offered what, and then determine what price they have to pay per share to fill their $10 million allotment.
Then the company pays out that minimum price to everyone who asked that price or below, but not those who bid above. In our example, let’s assume that XYZ determined, based on the offers it received, that it needed to pay $20 per share to fill its $10 million tender offer. Everyone who offered their stock below $20 per share would still receive the same $20 payout. However, if you offered your stock over $20 – even just $20.01 – then you’re out of luck and you don’t get to sell your stock in the tender.
The other major kind of tender offer occurs when a company offers to buy stock at an already-fixed price. So instead of having investors offer a price between $19 and $21, the company offers a flat $19.50. You can participate or not, as you see fit. If the stock is trading far enough below the tender price, then it’s a pretty simple decision. You can buy at a low price and then immediately sell to XYZ.
However, the catch with this type is that it’s usually oversubscribed. Often many stockholders want to participate, and they offer WAY more than the company has offered to buy. In this case, to resolve the dilemma, the company buys stock on a pro rata basis from everyone who offered it. While you may have wanted to sell 100 shares, XYZ may only end up buying 50, if the offer is twice oversubscribed.
Wait, how is the tender offer low risk? (Stick with me! Here’s the trick.) Back to the top.
What makes the tender offer low risk?
Well, there’s a wrinkle that’s great for small investors. It’s called the “odd lot” priority. If you own fewer than a specified number of shares – it’s all spelled out in the SEC filings for the offer – you go to the front of the line and are virtually guaranteed to sell your stock to the company. The “odd lot” is that number of shares. For example, the company will say that anyone who owns fewer than 100 shares will have priority. Sometimes the figure is 250, and occasionally 500. So you buy one less share – 99, 249, or 499, as the case may be – and then contact your broker to tender your stock. You’ll pocket the difference between your purchase price and the tender price. Very easy. Back to the top.
What are some tips and tricks?
Tip: I stick exclusively to tender offers with an odd lot priority that are trading below their offering price. As a rule of thumb, I want at least a net $100 for my time. I never try to tender more than the odd lot.
While this procedure is simple, you do have to remember a few things:
- You may own more shares of stock than you tender, but if you tender more than the odd lot, you’ll lose your priority. This usually means you won’t sell your full allotment.
- After you’ve purchased the stock, you HAVE to contact your broker to announce that you’re tendering your shares. Sometimes brokers have a fee for this and sometimes not, depending on whom you use. Never assume that a broker knows what you want to do with your stock.
- The timeline on tender offers is short, usually a month. If you intend to participate, act prudently but quickly. Sometimes brokers need as much as a week to process your offer.
- If the company runs the first type of auction with an odd lot priority, then you’ll want to offer stock at the low end of the range to ensure that your offer is filled. Sometimes this may not make financial sense, since the stock will be trading above the offer.
- The company could decide to not follow through with the tender for any number of reasons, but that’s rare. A company that undertakes a tender is often doing so because management thinks the stock is cheap at that price. They want to buy the stock and are unlikely to cancel. Back to the top.
When do you get paid?
A few days after the tender offer closes, the company will report the preliminary results of who can sell their shares. Then perhaps a week later the company will have the money sent to your account. Don’t worry if the money doesn’t show up immediately. You’re entitled to it and you’ll get it. Only if you haven’t received it after a couple weeks should you consult your broker about the process. However, snafus are very rare. Back to the top.