Tender offer

A tender offer is a broad, public solicitation to purchase securities directly from existing holders, bypassing the open market. The buyer — which can be an outside acquirer seeking control or the issuer itself buying back its own shares — announces a fixed price, typically at a premium to the current market price, and a deadline by which shareholders must respond.

Suppose a stock trades at $40 and an acquirer wants a controlling stake quickly. Rather than buying millions of shares on the exchange and driving the price up, it announces a tender offer at $48 per share for up to 51% of the outstanding stock. Shareholders who like the premium tender their shares; those who don't simply hold. If more shares are tendered than the buyer wants, shares are usually accepted on a pro rata basis.

Tender offers are heavily regulated. SEC rules require the offer to stay open for a minimum period and to be extended when key terms like the price change, so shareholders have time to make an informed decision. One frequently tested rule: an investor may only tender shares they are net long — you cannot tender shares you've sold short or otherwise don't beneficially own. Companies also use tender offers on the debt side, offering to repurchase outstanding bonds before maturity.

Tender offers appear throughout the securities licensing exams. The SIE and Series 7 test the mechanics — premiums, the net long requirement, and issuer buybacks — while the Series 66 touches on tender-style repurchases of fixed income securities. Expect questions that contrast tender offers with ordinary open-market purchases.