How does a tender offer work?
I think tender offers are really interesting because they present the shareholder with a clear choice: to tender, or not to tender?
There’s a lot that can go into making that choice, emotionally or otherwise, but since the process is somewhat exotic (less and less so this year), I get a lot of questions about the ins and outs of what could happen that I’d like to address all in one shot.
So here we go. I’m going to use the tender offer that is happening with Holcim Philippines [HLCM] right now as I talk through these examples, but the basics of this example will apply to any other tender offers that could pop up along the way.
> What is a tender offer? It’s a standing offer by a buyer, in this case a company called Holderfin, to buy shares in a specific company (HLCM) at a specific price (?5.33/share), over a specific period of time (July 10 through August 30).
> When do they happen? Sometimes they’re required by the rules of the PSE that are meant to protect minority shareholders, such as here where the controlling shareholders of HLCM want to delist the company and take it private. They can also be triggered by a sale that results in a change of control. But tender offers can also be initiated by any person or company to purchase shares in a company. Holderfin is a company registered in the British Virgin Islands. It could have initiated a tender offer for shares of AREIT if it wanted to. If we were willing to pay the fees and advisors to do it, you or I could do the same.
> Why do a tender offer? Aside from those times when it is required by the exchange’s rules, companies might conduct a tender offer to buy a huge chunk of shares at a fixed price. In a market like ours that is not especially liquid, a large purchase of shares using the open market runs the risk of artificially inflating the price. The buyer could reduce the impact of that by purchasing little bits over time to try and weave their buys into the general ebb and flow of the market tides, but that could take a long time, and it isn’t guaranteed to work. The set price is supposed to be an incentive for shareholders to part with their shares quickly, all in one go.
> How do I tender my shares? Contact your broker. The procedure to tender shares is a little different than selling on the open market, but it’s not complicated. It just takes talking with your broker.
> What happens when I tender? Initially, nothing. The buyer doesn’t actually “buy” the shares until the settlement date, which in this case is scheduled for September 13. That’s when shareholders that tendered their shares will receive their money. Once that happens, your shares are owned by the buyer.
> What if I change my mind? If you tender your shares and change your mind, you can pull your shares back out of the tender if you contact your broker during the offer period. I don’t have any experience with this, however, and I’m not sure if there are any details that a more experienced person might have on this. If you know, reach out! I’d love to share with readers. If you didn’t tender during the offer period, you will have missed your opportunity to participate.
> What happens if I don’t tender? You still own your shares. The tender offer process is not like a forced purchase of outstanding shares, it’s an optional thing that a shareholder may participate in or not depending on their particular circumstance. If you decide to hold on to your shares and not tender, and the company then goes ahead and delists (like HLCM plans to do), then you still retain ownership of your HLCM shares. You just won’t be able to use the PSE’s platform to sell your shares if ever you wanted to in the future.
> What happens to shares in a delisted company? Nothing! They’re the same as they were before, but just without the convenient marketplace (the PSE) for the sale or purchase of the shares. All other things equal, a private sale of a share of HLCM will be more “expensive” than selling the share through the PSE or through the tender offer. You will need to get in touch with a bank or brokerage to assist you in the trade, and they’ll have some fees. Not only that, but buyers of illiquid stocks (like delisted shares) usually demand a discount.
MB BOTTOM-LINE
None of the above is meant to say that the HLCM offer is a good deal or a bad deal; that’s a decision that each investor must make on their own, based on their own assessment of what might happen and how that might impact their unique set of investment parameters.
It’s just meant to shed additional light on a procedure that, because of its infrequent use, can sound scary and intimidating to some investors. To me, the three most crucial points are that there’s no rush to tender your shares to Holderfin (doing so at any time during the offer period is fine), you can change your mind at any time during the offer period even if you did already tender your shares, and there’s no guarantee that the buyer actually goes through with the tender offer.
It’s entirely possible for Holderfin to abandon the tender offer at any point, and if that happened, you’d just get your shares back. There’s no real opportunity cost there since HLCM has been suspended and is likely to remain that way, but that’s still a risk with any tender offer that should be considered, especially by those who are buying specifically for the purpose of selling into a potential tender. If there are any more questions on tender offers, send them my way!
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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