What is a Tender Offer and how does it work?

Written By:
January 28, 2024
What is a Tender Offer and how does it work?

A tender offer allows shareholders to sell their stock back to the company at a premium price. This blog post will provide an in-depth look at tender offers - how they work, their purpose, the process, and recent examples.  

What is a Tender Offer?

A tender offer is when a company offers to purchase shares from existing shareholders at a fixed price, usually at a premium to the current market price. The offer is open for a limited time. Shareholders can choose whether to participate by tendering their shares.

This method is most frequently employed during takeover attempts, where the acquiring entity seeks to gain control of the organization.

Key Players in Tender Offers

Tender offers involve 3 key participants who can benefit in different ways:  

1. The Sellers

Employees and early investors holding equity can monetize their shares and realize returns through a tender offer. This provides liquidity without having to wait potentially years for the company to go public or get acquired.

2. The Buyers

If the buyer is an outside investor, they gain the opportunity to acquire equity in a promising private company they want exposure to. If the buyer is the company itself, the tender offer allows them to reduce dilution of shares outstanding.

3. The Company

For the company initiating a tender offer, it helps them meet surplus investor demand after a financing round and attracts and retains talented employees. Employees highly value the chance to get cash for some equity as the company matures.

Different types of Tender Offers

Here are the 3 main types of tender offers conducted by private companies:

1. Share Buyback tender offer

A company offers to repurchase its own shares directly from existing shareholders. This allows the company to consolidate ownership or manage dilution. Share buyback tender offers are prevalent among late-stage private companies and can be structured to include all shareholders or targeted at specific groups such as employees.

2. Third-party tender offers

A third party like an investor or investment firm offers to purchase shares from existing shareholders. This allows the third-party companies to acquire a stake in the private company.

3. Partial tender offers

The company or third-party offers to buy just a portion of total outstanding shares. This approach sets a cap on the number of shares to be repurchased, effectively limiting the investment amount and mitigating the risk of oversubscription.

How does a Tender Offer work?

A tender offer is a financial instrument used by investors to acquire ownership stakes in companies through a structured process involving several key steps:

  1. Offer Submission: An investor proposes to buy shares from all shareholders of a publicly traded company at a specified price, typically representing a significant premium over the current share price.
  1. Company Consultation: The company receives the tender offer and consults with its legal counsel and board of directors (BOD).
  1. Preparing Disclosures and Transaction Documents: The company works with its legal counsel and the investors to prepare the necessary disclosures and transaction documents.
  1. Communication to Sellers: The terms of the offer, including the specified price and any conditions, are communicated to the individual shareholders.
  1. Shareholder Evaluation: Shareholders evaluate the offer and decide whether to accept or reject it.
  1. Purchase of Shares: If the tender offer meets the required conditions, the investor purchases the shares from the selling shareholders.
  1. Disclosure Requirements: Securities and Exchange Commission (SEC) regulations mandate that anyone acquiring 5% or more of a company must disclose their stake to the SEC, the target company, and the exchange.

What are the advantages and disadvantages of Tender Offer?

Tender offers have both advantages and disadvantages. Here are some of the pros and cons of tender offers:

Advantages of Tender Offers:

1. Tender offers can lead to a merger or acquisition taking place quickly.

2.Shareholders receive a fixed, above-market price for their shares.

3. Tender offers can allow the monetization of otherwise illiquid equity.

4. Investors are not obligated to buy shares until a set number is tendered, which eliminates large upfront cash outlays and prevents investors from liquidating stock positions.

5. Acquirers can include escape clauses, releasing liability for buying shares.

Disadvantages of Tender Offers:

1. Tender offers can be expensive, as investors pay SEC filing fees, attorney costs, and other fees for specialized services.

2. The tender offer can end up becoming expensive if it drags on or if other potential investors enter the fray.

3. Shareholders may be indecisive, and the tender offer may fail.

4. Participating in a tender offer means forgoing any future potential upside for those shares.

Example of Tender Offer

For instance, an offer might be made to purchase outstanding stock shares for $40 a share when the current market price is only $30 a share. The reason for offering the premium is to induce many shareholders to sell their shares. If the deal is completed, employees selling shares in the tender offer will realize their proceeds, and any gains above the fair market value are taxed.

Rules and Regulations for Tender Offers

Tender offers are subject to anti-fraud provisions and certain procedural requirements relating to how quickly holders must be paid for their tendered securities and the conditions required for a bidder to extend an offer.  

Tender offers are regulated by the SEC, its rules and regulations, and the Exchange Act of 1934. The SEC rules and regulations that apply to a tender offer depend on several factors, including whether it is for equity or debt and whether the bidder is an issuer or third party. Tender offers for securities of non-public companies are also subject to Regulation 14E.  

Tender offers must remain open for at least 10 business days under SEC rules and the Securities Exchange Act of 1934. Companies will often set qualifying criteria for participating in a tender offer, and sometimes, it might only allow participation for shareholders who have exercised their options and held the shares for a certain period.


In conclusion, tender offers are an important aspect of the corporate world, especially in mergers and acquisitions. They can provide a quick way for companies to take over other companies, but they can also dilute the ownership of existing shareholders. Companies can prepare for a tender offer by evaluating their financial health, communicating with shareholders, and ensuring compliance with regulatory requirements.  

Ultimately, the decision to participate in a tender offer is a personal one, and shareholders should carefully consider their financial goals and the potential impact on their holdings before accepting or rejecting the offer. Tender offers can create opportunities for significant gains, but they also highlight the unpredictable and constantly fluid dynamics of the stock market.

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