TENDER OFFERS

A tender offer asks the stockholders of a firm to submit, or tender, their shares for an established price. While tender offers may be made for any type of securities, they are usually made for common stock. A tender offer may be made by the firm that originally issued the stock, or by another company or group of investors. Tender offers are commonly used by issuing firms to repurchase a quantity of their stock. They are also used to acquire a controlling interest in a firm.

A tender offer must specify an offer price, the maximum number of shares that will be purchased, the beginning and expiration dates of the offer, and the last day when tendered stock can be withdrawn by shareholders. When a tender offer is made, it must remain open for a specified time period. During this time, shareholders have the right to withdraw shares they have already tendered. If the tender offer is oversubscribed—that is, more shares are tendered than are going to be purchased—then purchases must be made on a prorated basis. If the offer terms are amended to provide for a higher price, then shares already tendered automatically receive the higher price.

A tender offer that is made by the firm that originally issued the stock is known as a stock repurchase, or self-tender offer. This often occurs when management believes the company's stock is undervalued on the market. While a self-tender offer reduces the firm's liquidity—as it uses up some of its cash reserves—it also sends the message that management is confident of strong cash flows in the future. Consequently, a self-tender offer often has the effect of increasing the value of the company's stock.

A tender offer may be used to acquire controlling interest in a company. When one company seeks to gain control over another, it will usually approach the target company's management with a merger proposal. If an agreement cannot be reached with management, then a takeover bid can be initiated by making a tender offer to the company's stockholders.

In a two-tier tender offer, the acquiring company will make a tender offer to obtain voting control of the target company. In a second stage or tier, the acquiring company votes its controlling interest to obtain merger approval at a shareholders' meeting. Typically, the target company's shareholders would receive higher compensation for their shares in the first tier (tender offer), than in the second tier (merger).

High stock prices and increased competition to acquire desirable companies resulted in a surge in the number and value of tender offers transacted during 1997, the last year for which statistics were available. In 1997 there were 208 transactions involving tender offers worth a total of $ 111.4 billion, compared to 154 successful tender offers worth $75.2 billion in 1996 and 161 tenders worth $76.1 billion in 1995. The 1997 figure was the highest since 1989, when there were 208 tender offers worth $156.1

There are antitakeover measures a company may use to counter the threat of a two-tier tender offer. For example, a company may add fair price and super majority amendments to its corporate charter. A fair price amendment stipulates that an acquiring company must pay a fair price for all of the target company's shares that it purchases, which is usually the highest price the acquiring company has paid. A super majority amendment increases the necessary majority to approve an acquisition or merger from one-half to two-thirds. Companies may also attempt to thwart hostile takeovers by obtaining "marriage proposals," or more favorable tender offers, from other firms.

As a result of Congressional investigations, tender offers were placed under the jurisdiction of the Securities and Exchange Commission (SEC) by the Williams Act of 1968, which also established disclosure rules and other requirements for tender offers. The acquiring firm must provide 30 days' notice of its intention to make an acquisition to the management of the target firm and to the SEC. Another requirement is that the beneficial owner of the stock, as well as the party financing the acquisition, must be disclosed when substantial amounts of stock are being acquired with the intent to gain control of a firm. In addition, anyone making a tender offer that would result in ownership of more than 5 percent of a class of securities is required to file a report with the SEC.