Lesson 4 of 7
Dutch auctions and odd lots
In a modified Dutch auction the company sets a range and buyers of small lots go first. Read the mechanics from a real offer, and what it cleared at.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- In a modified Dutch auction the company names a price range and a total amount, and holders say at what price they will sell.
- Everyone accepted receives the same final price, which is the lowest price that fills the stated amount.
- Holders of fewer than 100 shares who tender all of them are bought first and in full, which is the odd lot preference.
A company buying back stock through an auction publishes the whole mechanism before anybody acts. That makes it one of the few corporate events where a reader can know the rules exactly, and the rules decide the outcome.
One offer, from announcement to settlement
- 2015-05-18Offer commencesUp to 200 million dollars of shares, at a price the holder names between 19.00 and 21.00 dollars, in 50 cent increments.
- 2015-06-22Offer expiresTenders close at midnight, New York City time.
- 2015-06-24SettlementAbout 10.5 million shares purchased at 19.00 dollars, roughly 200 million dollars, funded from the unsecured revolving credit facility.
How the price is found
The company does not set the price. It sets the range and the amount, and the holders set the price by what they are willing to accept.
The clearing mechanism, from the offer document
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Each holder tenders at a price of their choosing inside the range, or accepts whatever the final price turns out to be.
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After the offer closes, the company determines the lowest price within the range that lets it purchase the stated maximum amount.
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Every share accepted for payment receives that same final price, whatever price it was tendered at, subject to the odd lot and proration provisions.
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Shares tendered above the final price are not purchased and are returned.
In this offer the final price was 19.00 dollars, the bottom of the range. That is the common outcome and the one a reader should expect: enough holders were willing to sell at the low end to fill the amount, so nobody received more.
The odd lot preference, exactly as written
If more shares are tendered than the amount allows, the offer document sets the order of purchase. First, the company buys all shares tendered by odd lot holders, defined as holders of fewer than 100 shares, who tender all of their shares at or below the final price, do not withdraw them, and certify that they own fewer than 100 shares in aggregate. Second, after those are bought, all other shares properly tendered at or below the final price are purchased pro rata, with adjustments to avoid returning fractions.
The condition in that first sentence is the one people miss: to receive the preference, an odd lot holder must tender all of their shares.
What proration did here
Why the structure exists at all
A fixed-price tender offer asks the company to guess the price at which enough holders will sell. Guess too low and the offer fails; guess too high and the company pays more than it needed to. The auction moves that guess to the people who own the shares, at the cost of a wider notice period and a more complicated document.
For the holder, the structure has one consequence worth stating plainly. Naming a price at the bottom of the range maximises the chance of being accepted and guarantees nothing about what you receive, because everyone accepted is paid the same clearing price. Naming a price at the top protects against selling cheaply and risks not selling at all. Neither is a recommendation; both are just the mechanism read correctly.
Check yourself
Who sets the final price in a modified Dutch auction?
- The company, before the offer opens
- The tenders do: it is the lowest price inside the range that fills the stated amount
- The exchange, at the close on the expiry date
Show the answer
Answer: B.
The company sets a range and an amount. The clearing price is whatever the lowest price in the range is that buys the full amount.What must an odd lot holder do to receive the preference?
- Tender at the top of the range
- Tender all of their shares at or below the final price, not withdraw them, and certify they hold fewer than 100 in aggregate
- Hold the shares for at least a year first
Show the answer
Answer: B.
The offer document states all three conditions. A partial tender by an odd lot holder forfeits the preference and goes into the pro rata pool.In the real offer above, what happened to holders who tendered at the final price?
- All of their shares were purchased
- About 97 percent of their tendered shares were purchased and the rest returned
- None of their shares were purchased
Show the answer
Answer: B.
The offer was oversubscribed, so non-odd-lot tenders were prorated at approximately 97 percent.Sources
- Apple Hospitality REIT, Inc., Schedule TO-I filed 2015-05-18: the 19.00 to 21.00 dollar range in 50 cent increments, the 200 million dollar maximum, the same-price rule, the odd lot definition and conditions, and the order of purchase on oversubscription.
- Apple Hospitality REIT, Inc., results filed 2015-06-24 in the Form 8-K and the Schedule TO-I amendment: approximately 10.5 million shares at 19.00 dollars, funded from the unsecured revolving credit facility, with approximately 97 percent of tendered shares purchased.
What this leaves out
- The terms described are one issuer's, from one 2015 offer. Every offer sets its own range, amount, conditions and odd lot rules, and they must be read from that offer's own documents.
- An issuer tender offer is governed by rules that apply to the issuer, not to the holder. Nothing here describes any holder's tax position or what they should do.
- This is a closed, settled situation used to show the mechanics.
- Nothing here is advice about any security.