Explain Stock Tendering From a Buyout
- A corporation is owned by its stockholders, who have a right to vote and elect the board of directors. Once elected, the board of directors can make management decisions for the firm, including the decision to sell or merge with another company. If an investor or a group has controlling interest, they have enough stock to elect or disband the board of directors and make management decisions for the firm. In theory, controlling interest is at least 51 percent of all outstanding stock shares. However, in practice it may not require that many shares, as not all stockholders actually exercise their right to vote.
- In order to gain controlling interest in a company, investors who wish to buy out the company can make a tender offer directly to the shareholders. Generally, a tender offer is an offer to buy shares at a significant premium over the current price the stock is trading at in the markets. If enough investors agree to sell their shares, investors making the offer can gain controlling interest in the company.
- Tender offers are usually made by private equity firms who earn a profit on their purchases when they are able to sell the company they gained controlling interest in at a profit. Companies with a large value gap can be vulnerable to these types of hostile takeovers. A value gap exists when the company's assets are worth more than the combined value of the company's outstanding stock. In such an instance, a private equity firm may issue a tender offer to buy out the firm and then reorganize it or break it up and sell it off to other investors -- hopefully at a higher price than they paid.
- If you own stock in a company and receive a tender offer, the offer is always voluntary on your part. You have the right to either accept or reject the offer. Keep in mind, however, that if you reject the offer, you may end up owning shares in a company that will be broken up and sold off in pieces, and if you do not own enough stock to challenge those with controlling interest, it is unlikely you will be able to do anything about it.
