Definition
A self-tender offer is a public, open offer by a corporation to buy back a portion of its own outstanding shares from its shareholders at a specified price, usually at a premium over the current market price. This tactic is often utilized as a defense mechanism against hostile takeover attempts, aiming to reduce the number of shares available for an acquiring company to purchase.
Examples
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Example of Defensive Self-Tender Offer: Company A fears a hostile takeover by Company B. In response, Company A announces a self-tender offer to repurchase 10% of its outstanding shares at a price higher than the current market value. This reduces the number of shares on the open market and makes it more difficult for Company B to gain a controlling interest.
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Example of Enhancing Shareholder Value: Company X has excess cash and chooses to conduct a self-tender offer to repurchase its shares as a way to return capital to its shareholders, indicating confidence in the company’s financial stability and potentially increasing the stock’s market value.
Frequently Asked Questions (FAQs)
What is the primary purpose of a self-tender offer?
The primary purpose is typically to prevent a hostile takeover by reducing the number of outstanding shares, thus making it more challenging for an acquiring company to gain control. It can also be used to return excess cash to shareholders and to signal confidence in the company’s future prospects.
How do shareholders benefit from a self-tender offer?
Shareholders benefit as they can sell their shares at a premium to the market price. If they choose not to sell, the reduced number of shares can lead to an increase in the share price, potentially enhancing the value of their remaining shares.
Can a self-tender offer fail?
Yes, a self-tender offer can fail if not enough shareholders agree to sell their shares back to the company at the offered price. Additionally, legal and regulatory issues might impede the process.
What happens to the shares repurchased in a self-tender offer?
The repurchased shares are typically retired, reducing the total number of outstanding shares, which can increase the earnings per share (EPS) for the remaining shareholders.
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Tender Offer: A public offer by an entity to purchase a large portion of a company’s shares at a specified price, usually at a premium to the prevailing market price.
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Hostile Takeover: An acquisition attempt by a company or individual against the wishes and resistance of the target company’s board of directors.
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Share Buyback: The repurchasing of shares by the issuer to reduce the number of shares on the market.
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Greenmail: The purchasing of enough shares in a company to challenge its leadership, then threatening to take over unless lucrative terms are met.
Online References
- Investopedia: Self-Tender Offer
- Wikipedia: Tender Offer
- SEC Tender Offer Guidelines
Suggested Books for Further Studies
- “Mergers, Acquisitions, and Corporate Restructurings” by Patrick A. Gaughan
- “Takeovers, Restructuring, and Corporate Governance” by J. Fred Weston, Mark L. Mitchell, and J. Harold Mulherin
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe, and Bradford D. Jordan
Fundamentals of Self-Tender Offer: Corporate Finance Basics Quiz
### What is the main objective of a self-tender offer?
- [ ] To issue new shares.
- [x] To purchase the company's own shares.
- [ ] To sell the company.
- [ ] To open a new business line.
> **Explanation:** The main objective of a self-tender offer is for the company to purchase its own shares from shareholders.
### Which of the following is often an underlying reason for a self-tender offer?
- [x] To prevent a hostile takeover.
- [ ] To expand the company's operations.
- [ ] To improve employee benefits.
- [ ] To launch a new product.
> **Explanation:** Self-tender offers are frequently used as a defense mechanism against hostile takeovers by reducing the number of shares available for potential acquirers.
### What typically happens to the repurchased shares in a self-tender offer?
- [ ] They are reissued to new shareholders.
- [x] They are retired.
- [ ] They are donated to charity.
- [ ] They are converted to bonds.
> **Explanation:** Repurchased shares in a self-tender offer are usually retired, decreasing the total number of outstanding shares.
### Shareholders might benefit from a self-tender offer because:
- [ ] They gain voting power.
- [ ] They receive new shares.
- [x] They can sell their shares at a premium.
- [ ] They get ownership of the company.
> **Explanation:** Shareholders can benefit by selling their shares back to the company at a price typically higher than the current market value.
### What effect does a self-tender offer have on the number of outstanding shares?
- [ ] It increases the number of outstanding shares.
- [ ] It keeps the number of outstanding shares the same.
- [x] It decreases the number of outstanding shares.
- [ ] It has no impact on the number of outstanding shares.
> **Explanation:** A self-tender offer reduces the number of outstanding shares as the company buys back and often retires the repurchased shares.
### Self-tender offers are generally seen by the market as:
- [ ] An indicator of financial trouble.
- [x] A sign of company confidence.
- [ ] A standard business operation.
- [ ] A method to pay off debt.
> **Explanation:** Self-tender offers are often viewed as a sign of confidence by the management in the company’s value and future prospects.
### What is the difference between a self-tender offer and a regular tender offer?
- [ ] The company buys its shares in a self-tender offer, while any entity can buy in a regular tender offer.
- [x] True
- [ ] False
> **Explanation:** In a self-tender offer, the company itself is buying back its shares, whereas in a regular tender offer, any entity might make an offer to purchase a company's shares.
### How do self-tender offers affect the earnings per share (EPS) of a company?
- [ ] They generally decrease EPS.
- [ ] They have no effect on EPS.
- [x] They generally increase EPS.
- [ ] They depend on market conditions.
> **Explanation:** Since a self-tender offer reduces the number of outstanding shares, it generally leads to an increase in the company's earnings per share (EPS).
### Can a self-tender offer be part of a company's regular share buyback program?
- [x] Yes
- [ ] No
> **Explanation:** Yes, a company might use self-tender offers as part of its broader strategy to repurchase shares and return value to shareholders.
### In a self-tender offer, who sets the price at which the shares will be bought?
- [x] The company making the offer.
- [ ] The shareholders sell to the highest bidder.
- [ ] The price is set by the market regulator.
- [ ] The price is determined through an auction.
> **Explanation:** The company making the self-tender offer sets the price at which the shares will be repurchased, often at a premium over the current market price.
Thank you for delving into the strategic world of self-tender offers and participating in our quiz. Keep expanding your knowledge of corporate finance and strategic shareholder value mechanisms!
