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How Does a Tender Offer Work?

A tender offer allows a company or entity to do a public takeover of a business by buying many of its shareholders’ stock shares. Tender offers are typically public, as they literally ask shareholders to sell their shares for a certain price. These sale requests must be agreed to within a certain period of time, and often a minimum number of shares must be sold for it to officially go through.

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How Does a Tender Offer Work?

In the event that a company is looking to acquire a significant ownership stake in another company, it may issue a tender offer so it can buy shares from shareholders in a mass quantity. Getting shareholders to sell isn’t always easy, though. That’s why the entity issuing the tender offer will likely offer to buy shares at higher than market value. While a tender offer typically hinges on shareholders agreeing to sell a certain number of shares, this isn’t always the case.

A tender offer can be made with or without the consent of the company whose shares are being pursued. When a company issues a non-consensual tender offer, it’s referred to as a “hostile takeover.” This tactic can be used by private equity firms, hedge funds and other large-scale investment organizations.

Purposes of Tender Offers

A tender offer is a useful way for an organization to gain majority ownership of another company. Since most tender offers only obligate the buyer to purchase the shares if there’s enough selling interest from shareholders, you can look at a tender offer as a low-risk way to accomplish the aforementioned goal.

If the acquiring entity owns more than 5% of the selling company, it must be reported to the U.S. Securities and Exchange Commission (SEC). As a result of this, a tender offer can require a company to pay significant legal and trading fees. So in some cases, a tender offer isn’t the cheapest way of completing a takeover. However, its overall effectiveness can hardly be questioned.

Bottom Line

How Does a Tender Offer Work?

A tender offer is simply a way for one company to perform a takeover of another company. It involves offering to buy the company’s public shares from shareholders, often at a price above the market rate. The acquiring company typically isn’t bound to purchase shares unless certain conditions are met. In turn, issuing a tender offer is an attractive and non-risky way for a company to perform a takeover.

Investing Tips

  • If you’re building an investment portfolio, it’s important to follow a specific asset allocation. A financial advisor can be a great resource to help with this process. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. Get started now.
  • Investing on your own is no easy task. Our guide to investing for beginners can get you started on the right foot.

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Sam Lipscomb, CEPF® Sam Lipscomb is a writer for SmartAsset. His work spans a wide variety of personal finance topics with expertise including retirement, investing and savings. He is particularly well versed in credit cards. Sam has been featured in The Economist and on The Points Guy. He is a Certified Educator in Personal Finance (CEPF®). Sam graduated from Kenyon College with a degree in Economics and enjoys being a go-to resource for family and friends when it comes to personal finance. Originally from Washington, DC, Sam loves all things aviation and is a Cleveland sports fan. He currently lives in New York.
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