Question

LIU plc are considering raising equity finance to fund expansion into a new market. (a) The board of directors of LIU Plc decided to use the offer for sale by tender method to issue their shares to the public when they entered the stock exchange in 2010. Describe how the offer for sale by tender process works and indicate the possible advantages and disadvantages of using this approach.

Answer 1

A tender offer is a proposal that an investor makes to the shareholders of a publicly traded company. The offer is to tender, or sell, their shares for a specific price at a predetermined time. In some cases, the tender offer may be made by more than one person, such as a group of investors or another business. Tender offers are a commonly used means of acquisition of one company by another.

How offer for sale by tender process works

A tender offer often occurs when an investor proposes buying shares from every shareholder of a publicly traded company for a certain price at a certain time. The investor normally offers a higher price per share than the company’s stock price, providing shareholders a greater incentive to sell their shares.

Most tender offers are made at a specified price that represents a significant premium over the current stock share price. A tender offer might, for instance, be made to purchase outstanding stock shares for $18 a share when the current market price is only $15 a share. The reason for offering the premium is to induce a large number of shareholders to sell their shares. In the case of a takeover attempt, the tender may be conditional on the prospective buyer being able to obtain a certain amount of shares, such as a sufficient number of shares to constitute a controlling interest in the company.

A publicly traded company issues a tender offer with the intent to buy back its own outstanding securities. Sometimes, a privately or publicly traded company executes a tender offer directly to shareholders without the board of directors’ (BOD) consent, resulting in a hostile takeover. Acquirers include hedge funds, private equity firms, management-led investor groups, and other companies. The day after the announcement, a target company’s shares trade below or at a discount to the offer price, which is attributed to the uncertainty of and time needed for the offer. As the closing date nears and issues are resolved, the spread typically narrows.

Pros of Tender offer :-

1. investors are not obligated to buy shares until a set number are tendered

2.eliminates large upfront cash outlays and prevents investors from liquidating stock positions

3. if offers fail. Acquirers can also include escape clauses, releasing liability for buying shares. For example, if the government rejects a proposed acquisition citing antitrust violations, the acquirer can refuse to buy tendered shares.

4.In many instances, investors gain control of target companies in less than one month if shareholders accept their offers; they also generally earn more than normal investments in the stock market.

Cons of Tender offer

1. A  tender offer is an expensive way to complete a hostile takeover as investors pay SEC filing fees, attorney costs, and other fees for specialized services.

2. It can be a time-consuming process as depository banks verify tendered shares and issue payments on behalf of the investor.

3.Also, if other investors become involved in a hostile takeover, the offer price increases, and because there are no guarantees, the investor may lose money on the deal.