What Is a Tender Offer?

• →Schedule TO, filed by the bidder on the day the offer starts: the price, the conditions, the funding, the bidder's plans for the company, and the offer document itself.
• →Schedule 14D-9, filed by the target's board within ten business days: its recommendation to accept or reject, the reasons, and the fairness opinion from its bankers.
• →Amendments to both as the offer is extended, raised or the conditions change, and a final amendment reporting how many shares were tendered.
• →Schedule 13D by the bidder if it holds 5% or more, and Form 4 lines with code U from insiders who tender their shares.

For an issuer buying its own stock, the same Schedule TO applies, and a going-private transaction adds a Schedule 13E-3 with extensive disclosure about fairness.

An offer must stay open at least 20 business days, and at least 10 business days after any change in price or in the number of shares sought. All holders must be able to participate, and every holder must receive the best price paid to any holder. The bidder cannot buy outside the offer while it is open. Shareholders who tender can withdraw while the offer is open. These rules were written so that shareholders are not stampeded into accepting a bid before the board and the market can respond.

Most offers are conditional on a minimum number of shares being tendered, usually a majority, and on regulatory approvals. In Delaware, a bidder that reaches a majority through the tender can complete a merger for the remaining shares without a shareholder vote, which is why the tender-offer-plus-merger structure closes faster than a merger vote alone.

A friendly offer follows a signed merger agreement: the board recommends it, the timetable is fixed, and the main uncertainty is regulatory. A hostile offer goes over the board's head. The board can respond with a shareholder rights plan that dilutes the bidder if it crosses a threshold, with a search for a higher bidder, or with a campaign to persuade holders not to tender. Hostile offers often end with a raised bid and a signed agreement, or with the bidder walking away. Activists use the threat of a tender offer more often than the offer itself.

Once an offer is public the shares trade near the offer price, below it by a spread that reflects the market's view of the risk that the deal fails or is delayed, and sometimes above it when a higher bid is expected. Merger arbitrage funds buy the shares and tender them, capturing the spread. A widening spread signals trouble with financing, regulators or the vote; a stock trading above the offer means the market expects a bump. When the offer closes, the tendered shares are paid for, and the remaining holders are squeezed out in the follow-on merger at the same price.

For readers of ownership filings, the tender offer is the end of the story a Schedule 13D began. InsiderWatch alerts on the 13D, records the stake, and treats a subsequent offer for the same company as the developing thesis rather than a new event.