Tender offers are used when an investor, a group of investors, or an organization wants to buy a significant portion of an issuer’s stock. Outside investors (those with no connection to the issuer) sometimes use tender offers to attempt a hostile takeover. As discussed earlier in this unit, common stock investors maintain voting rights. If an investor accumulates a large enough ownership stake, they may gain enough voting power to influence corporate decisions or push for specific corporate actions.
Sidenote
Xerox's failed hostile takeover of HP Let’s look at Xerox Holdings Corp (ticker: XRX) and its failed hostile takeover attempt of HP Inc. (ticker: HPQ). In late 2019, Xerox offered to purchase HP for roughly $33 billion. HP’s board of directors (BOD) quickly rejected the offer and stated:
“Xerox’s proposal significantly undervalues HP - and is not a basis for discussion.”
Even though HP didn’t want the deal, Xerox continued pursuing it. With help from billionaire investor Carl Icahn (who held large positions in both companies), Xerox obtained $24 billion in financing to buy more HP shares (and gain more voting power) in early 2020. Xerox then nominated 11 hand-picked individuals for BOD positions. With enough voting power, Xerox could potentially get most (or all) of them elected. From there, Xerox could make another offer to purchase and merge with HP. With its preferred board members in place, the deal would be much more likely to go through. This is a common approach in hostile takeovers. In March 2020, the COVID-19 crisis created major uncertainty, and Xerox abandoned its takeover attempt. If the pandemic hadn’t happened, it’s possible the attempt could have succeeded.
For a hostile takeover to succeed, the takeover party generally needs to acquire more shares. One option is buying shares in the open market, but that can create a surge in demand. Higher demand can push the stock price up, making the takeover more expensive. Most hostile takeovers use tender offers to reduce this problem. Tender offers are direct proposals to buy securities from current investors, usually at a premium to the current market price. For example, to acquire more HP shares in early 2020, Xerox offered HP investors $18.40 in cash and 0.149 shares of Xerox stock for each HP share tendered. At the time, that package was worth about $24 per HP share, while HP stock was trading around $17 per share. The roughly $7 premium was meant to persuade HP shareholders to sell. Current stockholders decide whether to tender their shares or reject the offer. To be eligible to tender, an investor must be long the stock. Investors with short positions can’t tender stock. Investors who hold convertible securities can tender only after they’ve submitted irrevocable conversion instructions (for example, an HP convertible bondholder converts the bond into HP common stock).
Long
The purchase and subsequent ownership of a security
Short
The sale of borrowed securities
Convertible security A security that is convertible into common stock of the same issuer
For example: an HP bond (a type of debt security) that is convertible into HP stock
There are a few key regulations for tender offers:
Investors must be given at least 20 business days to decide. If any terms of the tender offer change (for example, the tender price), the offer must be extended by another 10 business days.
Although we’ve focused on tender offers for common stock, a tender offer can be made for any security. An issuer can also make a tender offer for its own securities. For example, General Electric Company (ticker: GE) issued a tender offer for $5 billion of its outstanding debt in 2019. Issuers may also repurchase their securities in the open market. When an issuer repurchases its own stock this way, it’s called a stock buyback. Issuers often repurchase shares to benefit stockholders. With fewer shares outstanding, the issuer can report higher earnings per share (EPS) on its financial reports, even if the company’s total earnings stay the same.
For example, assume the following:
ABC Company
Outstanding shares: 1,000,000
2022 annual earnings: $5,000,000
Let’s use the earnings per share formula:
EPS=Outstanding sharesAnnual earnings
EPS=1,000,000$5,000,000
EPS=$5.00 Now assume ABC Company repurchases 200,000 shares in 2023 but reports the same annual earnings of $5 million. The new EPS is:
EPS=800,000$5,000,000
EPS=$6.25 EPS is a figure many investors and analysts watch closely. Buybacks can increase EPS by reducing the number of shares outstanding, but buybacks also cost money. If the issuer can fund the repurchase and still maintain earnings, EPS will rise. Stock buybacks became a major political topic in 2020 because many issuers that had been buying back stock later needed financial support from the government during the COVID-19 crisis.
Key points
Hostile takeover
An unwanted attempt from one party to take over an issuer’s business
Typically involves the outsider:
Purchasing significant stock positions
Instilling hand-picked individuals into BOD positions
New board structure bending to the will of the outsider
Tender offers
Proposal to purchase security from current investors
Offered at a premium to market price
Participants must be long the security
Must be available for at least 20 business days Must be available for an additional 10 business days if offer changes
Stock buybacks
Issuer repurchases its shares from market
EPS increases with fewer shares outstanding
Earnings per share (EPS)
Earnings / outstanding shares
Measures profitability on a per share basis
Tender offers are used when an investor, a group of investors, or an organization wants to buy a significant portion of an issuer’s stock. Outside investors (those with no connection to the issuer) sometimes use tender offers to attempt a hostile takeover.