Tender offers are special corporate events where a buyer offers to purchase shares directly from shareholders at a specific price. These events create unique trading opportunities, especially for retail traders who can take advantage of odd lot provisions that favor small shareholders.
What is a Tender Offer?
A tender offer is a public proposal to buy shares from existing shareholders at a specified price, usually at a premium to the current market price. Shareholders can choose to "tender" (sell) their shares or hold onto them. Tender offers have a set expiration date and specific terms that govern the transaction.
Key distinction: Unlike mergers where you automatically receive the deal consideration, tender offers give you the choice to participate or not. You must actively tender your shares by the deadline to receive the offer price.
Types of Tender Offers
Third-Party Tender Offers
An outside company offers to buy shares, usually as part of an acquisition. The offer price is typically at a significant premium to attract shareholders.
Example
Company A wants to acquire Company B. Instead of negotiating with management, Company A makes a tender offer directly to Company B shareholders at $60 per share when the stock trades at $45. Shareholders can accept the premium by tendering their shares.
Self-Tender Offers (Buybacks)
A company offers to buy back its own shares from shareholders. These are often done at a fixed price or through a Dutch auction where shareholders specify the price they are willing to accept.
Mini-Tender Offers
Offers to purchase less than 5% of a company's shares. These are less regulated and often come at below-market prices. Generally, these should be avoided.
The Odd Lot Advantage
One of the best opportunities in tender offers is the odd lot provision. Most tender offers give priority to shareholders who own fewer than 100 shares (an "odd lot"). This means small shareholders get all their shares purchased while larger holders may be prorated.
Example: Odd Lot Arbitrage
A company announces a self-tender at $25 per share when the stock trades at $24. They are buying back 10% of shares outstanding. If you own 99 shares (odd lot), all your shares will be accepted. If you own 10,000 shares, you might only have 1,000 shares (10%) accepted.
As an odd lot holder, you capture the full $1 spread on all 99 shares ($99 profit) with no proration risk.
Trading Strategies for Tender Offers
Strategy 1: Odd Lot Participation
When a tender offer is announced, buy just under 100 shares to qualify for odd lot priority. This guarantees full participation in the tender at the offer price.
Strategy 2: Spread Capture
Buy shares trading below the tender price and tender for a guaranteed profit. Calculate your return based on the spread and time to tender completion.
Return calculation: If you buy at $24, tender at $25, and the tender closes in 30 days, your return is 4.17% ($1/$24). Annualized, that is about 50%. Even better if you qualify for odd lot treatment.
Strategy 3: Dutch Auction Tender
In a Dutch auction, shareholders specify the lowest price they will accept within a range. The company then determines the lowest price at which they can buy the desired number of shares. Strategy: tender at the low end of the range to ensure acceptance.
Example: Dutch Auction
A company offers to buy back shares at prices between $20 and $23. You own shares currently worth $19. You tender at $20 (the low end) to maximize your chances of acceptance. If most shareholders tender at $22-$23, the clearing price might be $22, and you receive $22 even though you tendered at $20.
Strategy 4: Withdraw and Trade
If the market price rises above the tender price during the offer period, you can withdraw your tendered shares and sell on the open market instead. Most tender offers allow withdrawal until the expiration date.
Key Dates and Terms
- Commencement date: When the tender offer begins
- Expiration date: Deadline to tender your shares
- Withdrawal deadline: Last day to withdraw previously tendered shares
- Proration: If more shares are tendered than the company wants to buy, each shareholder may only have a portion accepted
- Odd lot priority: Holders of fewer than 100 shares get their full position accepted before proration applies to larger holders
- Minimum condition: Many tenders require a minimum number of shares to be tendered before the deal proceeds
Risks and Considerations
- Proration risk: You may not get all your shares accepted (unless you are an odd lot holder)
- Deal failure: The tender may not meet minimum conditions and be cancelled
- Timing: Your capital is locked up until the tender completes
- Tax implications: Tender proceeds are typically taxable as capital gains
- Opportunity cost: If the stock rises above the tender price, you miss out
How to Tender Your Shares
The mechanics of tendering depend on your broker:
- Contact your broker: They will have the tender offer documents and instructions
- Review the terms: Understand the price, timeline, and conditions
- Submit your decision: Instruct your broker to tender some or all of your shares
- Wait for results: After expiration, you will learn if your shares were accepted
- Receive proceeds: Cash or new shares are delivered to your account
Pro tip: Some brokers charge fees to participate in tender offers. Check with your broker before trading to understand any costs that might eat into your profits.
Finding Tender Offer Opportunities
- SEC filings (Schedule TO for third-party offers, Schedule TO-I for self-tenders)
- Company press releases and investor relations pages
- Financial news sources covering corporate actions
- Specialty newsletters focusing on merger arbitrage and corporate events
Track Your Tender Offer Trades
Pro Trader Dashboard helps you track all your corporate event trades including tender offers. Monitor your positions, calculate returns, and analyze your performance.
Summary
Tender offers provide excellent opportunities for arbitrage traders, especially retail investors who can take advantage of odd lot provisions. The key is understanding the terms, calculating your expected return, and managing proration risk. Self-tender buybacks with odd lot priority offer some of the lowest-risk arbitrage opportunities available. Always read the tender offer documents carefully and be aware of all deadlines.
Ready for more corporate event strategies? Check out our guide on merger and acquisition trading or learn about stock buyback opportunities.