tender offer

A public proposal by an issuer or third party to buy back outstanding securities (debt or equity) from holders, usually at a premium.

A tender offer is a formal, public invitation extended by an acquiring company, an activist investor, or the issuing corporation itself to all holders of a specific security. The offeror proposes to purchase a designated number of shares or bonds at a specified price within a set timeframe. To incentivize security holders to sell, the offer price is typically set at a premium over the current market price. In equity markets, tender offers are frequently used to execute corporate takeovers, friendly mergers, or large-scale share buybacks. In debt markets, corporations issue debt tender offers to buy back their outstanding bonds early, allowing them to retire expensive high-coupon debt or eliminate restrictive covenants. Because these offers are public and subject to strict regulatory oversight, they must remain open for a minimum number of business days to allow investors sufficient time to review the terms. Investors must carefully evaluate a tender offer by comparing the premium against the long-term prospects of keeping the security. If a third party makes a hostile tender offer, the target company's management may advise shareholders to reject it if they believe the offer undervalues the business. A key risk for investors is that tender offers are often conditional on a minimum level of participation (such as acquiring 51% of outstanding shares); if too few holders tender their securities, the offer may be canceled, and the security's price may drop back to its pre-offer level.

Company A shares trade at $40. An acquiring firm launches a tender offer to buy up to 10 million shares directly from investors at $50 per share. An investor holding 100 shares decides to participate, receiving $50 per share instead of the market price, resulting in a premium of $10 per share, or $1,000 in total premium ($50 - $40 = $10 premium 100 shares).