Lesson 4 of 7
Tender offers and Dutch auctions
A tender offer buys shares straight from holders at a stated price, open at least 20 business days. Proration decides how many of yours are bought.
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.
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In one minute
- A tender offer is a public offer to buy shares directly from holders at a stated price, and SEC rules require it to stay open at least 20 business days.
- When more shares are tendered than the offer seeks, each holder is prorated: accepted in the same proportion as everyone else who tendered.
- A Dutch auction lets holders name their own price within a range, and the company pays the single lowest price that lets it buy the number of shares it sought.
A tender offer is a public invitation to buy shares straight from holders at a stated price, rather than through the market. It must stay open at least 20 business days, so no holder is rushed. When it draws more shares than it sought, every tendering holder is cut back by the same proportion.
How a tender offer runs its course
- Day 0Offer announcedThe buyer states the price and the number of shares it seeks.
- Within daysSchedule TO filedThe offer's complete terms become public.
- At least 20 business daysOffer stays openHolders decide whether to tender their shares.
- After the deadlineProration, if oversubscribedShares are accepted in proportion if more were tendered than sought.
- Shortly afterPaymentAccepted shares are paid for; the rest are returned to holders.
What a tender offer promises, and what it can still change
The stated price and share count are not always final. The buyer can raise the price or extend the deadline, and both changes reopen the offer to holders who already tendered or already declined. The offer can also carry conditions: a minimum number of shares must be tendered, financing must be in place, no material change to the target's business may have occurred. Rule 14e-1 sets the 20 business day floor for every tender offer, and a change in the price or the number of shares sought keeps the offer open at least 10 more business days. A company buying its own shares also follows Rule 13e-4. Either way, the buyer files a Schedule TO.
Proration, when too many shares show up
An offer usually seeks a fixed number of shares, not every share a holder owns. If holders tender more than that number, the buyer accepts them in proportion, so every tendering holder has the same share of what they offered accepted, not first come, first served.
A Dutch auction lets holders set the price
In a Dutch auction tender offer, the company states a price range instead of a single price. Each holder names the lowest price within that range at which they will sell. The company then finds the lowest price in the range that buys the number of shares it sought. Every accepted holder receives that same clearing price, whatever they named.
What a buyback tender offer may be saying
A company can also buy back its own stock through a tender offer rather than in the open market. It is a faster, larger and more visible commitment than an ongoing open-market program, usually priced above where the stock traded before the offer was announced. The offer document usually states whether directors and officers will tender their own shares. A company buying while its insiders hold says something different from one whose insiders sell into the offer.
Check yourself
Under SEC Rule 14e-1, what is the minimum time a tender offer must stay open?
- 5 calendar days
- 20 business days
- 90 calendar days
Show the answer
Answer: B.
Rule 14e-1 sets a floor of 20 business days, so holders are not rushed into tendering their shares.An offer seeks 10 million shares and holders tender 25 million. What share of each holder's tendered stock is accepted?
- 100 percent, on a first-come basis
- 25 percent
- 40 percent
Show the answer
Answer: C.
10,000,000 divided by 25,000,000 is 40 percent. Apart from any odd-lot priority, every tendering holder is cut back by the same proportion.In a Dutch auction tender offer, what price does an accepted holder actually receive?
- The price they personally named
- A single clearing price, the lowest price within the range that fills the offer
- The market price on the day they tendered
Show the answer
Answer: B.
The company finds the lowest price in its stated range that buys the shares it sought and pays that one clearing price to every holder accepted.Sources
- SEC Rule 14e-1, the minimum offering period for every tender offer; Rule 13e-4 for an issuer's offer for its own shares; Schedule TO, filed for both.
What this leaves out
- The 10 million, 25 million and 40 percent figures are round invented numbers, chosen so the proration can be checked by hand.
- Not every tender offer is oversubscribed, and proration terms vary by offer; read the actual Schedule TO for the terms of any specific one.
- Nothing here is advice about any security.