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Tender Offer a Strategy to Take Control Over The Target Company

A tender offer is a type of public takeover bid. The tender offer is a public open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of the publicly traded corporation (the target corporation) to tender their stock for sale at a specific price during a particular time, subject to the tendering of a minimum and a maximum number of shares. In a tender offer, the bidder contacts shareholders directly, and the company directors may or may not have endorsed the tender offer proposal.

To cause the company’s shareholders to sell their stock,  the acquirer’s office price is usually at a premium over the target company shares’ current market price.  For example, if a target corporation stock were trading at $ 10 per share, an acquirer might offer $ 11.50 per share to shareholders on the condition that 51% of shareholders agree. In addition, cash or securities may be provided to the target company shareholders. However, a tender offer in which securities are offered as consideration is generally referred to as an exchange offer. 

In the 1960s, the tender offer became a more popular means of taking control of a corporation and ousting entrenched management. In tender offers that are used as the consideration, the disclosure requirement of the Securities Act of 1933 provided some limited regulation. In cash offers, however, there was no such regulation. As a result, the Securities Exchange Commission (“SEC”) sought to fill the gap in the law, and Senator Harrison William, chairman of the Senate Banking Committee, proposed legislation for that purpose in 1967. The William Act won congressional approval in 1968

The tender offer was the most frequently used tool for a hostile takeover in the 1980s, whereas the proxy fight was the weapon of choice in earlier years. Companies recognized Tender offers as a powerful means of taking control of a large corporation in INCO’s acquisition of the ESB Corporation in 1973.INCO employed its tender offer strategy with the help of an investment banker. Morgan Stanley and Company. This takeover was the first hostile takeover by a major, reputable corporation, and the fact that a major corporation and leading investment bank chose to launch a hostile takeover helped the legitimacy and acceptability of a hostile takeover. 

Reason for Using a Tender Offer.

A company usually attempts a tender offer when a friendly, negotiated transaction does not appear to be a promising alternative. The cost associated with a tender offer, such as legal filing fees and publication costs, make a tender offer a more expensive choice than a negotiated deal. Initiating a tender offer usually means that the company will be taken over, though not necessarily by the firm that created the tender offer. The tender offer may put the company “in play, “ which may cause it to be taken over by another firm seeking to enter the target’s bidding contest. The auction process may significantly increase the cost of using a tender offer. It also tends to increase the returns enjoyed by the target shareholders.

Cash versus Securities Tender Offers

The firm initiating a tender offer can go with an all-cash tender offer or use securities as part or all of the consideration for the offer. Securities may be attractive to some target shareholders because, under certain circumstances, the transaction may be considered tax-free. In addition, the bidding firm may create a flexible structure for target shareholders by using the double-barreled offer. This is an offer where the acquirer gives the target shareholders the option of receiving cash or securities in exchange for their shares.

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