Tender Offers: What Companies Need to Know

You've spent years building up your startup, and now it's finally taking off. Growth is accelerating, revenue is climbing, and you're thinking about funding options to fuel expansion. One day, out of the blue, you get an unsolicited offer from a big company to buy your startup for an attractive price. This is known as a tender offer, and it can be tempting when growth is hard and an exit could set you up for life. But before you sign on the dotted line, it's important to understand exactly what a tender offer is and the implications it could have. In this article, we'll break down how tender offers work, key considerations for evaluating one, and steps you can take to get the best deal for your startup.

Growth may be hard, but selling too soon could be even harder.

Do your homework and don't leave money on the table.

What Is a Tender Offer?

A tender offer is when an investor makes an offer to purchase some or all of a company's shares directly from existing shareholders. Usually, the offer is at a premium to the current market price, hoping that shareholders will sell at a profit.

For startups, a tender offer often means your company has gained the interest of an investor. But it also means you need to act quickly to review the offer and determine the best path forward for your business and shareholders.

Assessing the Offer

Carefully analyze the offer details. Consider the offer price, the number of shares the investor wants to buy, and their goals. Do they want control or just a stake? You'll want to evaluate how the new investor might impact your company's direction.

Consult your board of directors and legal counsel. They can help determine if the offer is fair and in the best interests of your company. You may want to negotiate the offer or explore other options.

Responding to Shareholders

Shareholders will likely have questions about the offer. Be transparent in communicating details about the investor, offer terms, and your assessment. Let shareholders know if you recommend accepting or rejecting the offer.

Provide a reasonable amount of time for them to make a decision. If some or all shareholders accept the offer, you will need to facilitate the share transfer and payment process on their behalf.

A tender offer is a big step, but with the right partners and approach, it could help propel your startup to new heights.

Carefully weigh all options to make the choice that's right for your business.

How a Tender Offer Works

A tender offer allows an investor to buy a large number of shares in a public company, usually at a premium over the current market price. If successful, the investor gains control of the target company.

As a startup founder, you need to know how tender offers work in case your company becomes the target. First, an investor will announce their intent to purchase a certain number of shares at a specified price, typically 10-30% over market value. They'll also set an expiration date for shareholders to tender their shares.

If enough shares are tendered, the offer is successful and the investor purchases them, gaining control of your company. If not enough shares are tendered, the offer fails and shares continue trading as usual.

There are a few ways companies can respond to a tender offer:

1. Recommend that shareholders accept or reject the offer. As CEO, you'll need to determine if the offer is fair and in the company's best interest.
2. Look for a "white knight" - an alternative investor willing to buy shares at a higher price. This counteroffer encourages shareholders to reject the initial tender offer.
3. Implement defensive tactics like a poison pill to make the target less attractive. But this risks shareholder lawsuits if not handled properly.

In the end, as a startup founder, the choice comes down to whether losing control of your company is worth the premium offered to shareholders. It's not an easy decision, but understanding how tender offers work is the first step to navigating one successfully.

What are the different types of tender offers for private companies?

There are a few common types of tender offers for private companies:

Friendly Tender Offers

A friendly tender offer is when a company's board of directors approves and recommends the offer to shareholders. The board believes the offer is in the best interest of the company and shareholders. Friendly offers typically have a higher chance of success since the board's recommendation carries weight with shareholders.

Hostile Tender Offers

A hostile tender offer is an unsolicited bid that the target company's board does not approve or recommend. The bidding company is attempting to gain control despite the target board's disapproval. Hostile offers are riskier since the board can take actions to defend against the offer and shareholders may be less inclined to accept an offer not recommended by the board.

Partial Tender Offers

In a partial tender offer, the bidding company is only seeking to purchase a portion of the target company's shares, like 30-50% ownership. If successful, the bidding company gains significant influence or control. The target company remains publicly traded but the bidding company becomes a major shareholder and may gain board seats.

Any and All Cash Offers

An any and all cash offer means the bidding company will purchase all shares tendered at a fixed cash price. Shareholders can tender as many or as few shares as they want. These offers provide liquidity and typically a premium over the current share price.

Dutch Auction Offers

In a Dutch auction offer, shareholders specify the minimum price they are willing to accept for shares. The bidding company then purchases all shares at the lowest price that allows them to reach their target ownership amount. This approach aims to pay the lowest price possible to gain control.

Advantages of a Tender Offer

As a company exploring strategic options, a tender offer presents several key advantages worth considering.

Increased control

A tender offer allows you to gain a controlling interest in another company by bypassing the target's board of directors and purchasing shares directly from shareholders. This can be an attractive option if you believe the target's board will not approve a merger or if you want to gain control without a lengthy proxy fight.

Potential cost savings

By purchasing shares through a tender offer rather than an outright merger, you may be able to acquire the target company at a lower cost. Shareholders who tender their shares are typically offered a premium over the current stock price, but less than what a merger deal might cost. This can result in overall cost savings for the acquiring company and its shareholders.

Speed

The tender offer process can often move faster than a traditional merger. The required filings and approvals may take less time, allowing you to gain control of the target company more quickly.

The downside is that tender offers can be riskier due to less regulatory oversight. However, for companies seeking to move fast, a tender offer may have advantages in terms of timing and agility.

Opportunity to test the waters

Launching a tender offer allows you to gage shareholder interest before committing to an acquisition. If enough shares are tendered to meet your ownership goals, you can then proceed to complete the transaction. But if interest proves lackluster, you have the flexibility to withdraw the offer with limited consequences. This can be a way to effectively test the viability of an acquisition before spending time and money on a merger that may not come to fruition.

Disadvantages of a Tender Offer

A tender offer isn't without its downsides. As an entrepreneur, it's important to consider the potential disadvantages before moving forward with one.

Loss of Control

Once shares have been tendered, you lose control of them. The acquiring company now has the voting rights and can do what they want with the shares, including selling them off. For founders who want to maintain control and direction over their company, a tender offer may not be the best path forward.

Pressure to Tender

There can be a lot of pressure for shareholders to tender their shares, even if they don't want to sell. The high premiums offered and fear of missing out on the opportunity can persuade people to tender when they otherwise wouldn't. This can lead to resentment down the road.

Costs

Tender offers often come with high costs for both the target and acquiring companies. Legal, accounting and printing fees can amount to millions of dollars. If the tender offer is unsuccessful, these costs are wasted. For small companies or startups, these fees may be too substantial to make a tender offer viable.

• Lawsuits: Tender offers frequently spur lawsuits from shareholders, which rack up even more costs. Disgruntled investors may claim the offer price is too low or that disclosures were inadequate.
• Distraction: The time and resources required for a tender offer can distract management from running the day-to-day operations of the business. This disruption and diversion of focus can be damaging, especially for a young company.

While tender offers have their advantages, startup founders should weigh these potential downsides before determining if one is the right path for their company and shareholders. By going in with eyes open to the possible disadvantages and costs, you can make the most informed choice.

Tender offer example

A tender offer example is when Company A makes an offer to purchase some or all of the shares of Company B from Company B's shareholders at a specified price per share. If enough shareholders tender their shares, Company A gains control of Company B.

For example, say Startup X is a hot tech company with innovative products and fast growth. An established firm, Conglomerate Y, wants to acquire Startup X to gain access to their technology and talent. Conglomerate Y makes a tender offer of $25 per share to purchase Startup X, even though the current market price is only $15.

Startup X's shareholders have to decide whether or not to accept Conglomerate Y's offer and sell their shares. If over 50% of shareholders tender their shares, Conglomerate Y gains control and buys out any remaining shareholders at the $25 price. Startup X becomes a subsidiary of Conglomerate Y.

Founders and executives at Startup X have to determine if the tender offer is in the best interest of their company and shareholders. $25 per share is a big premium, but they would lose control and autonomy. They can also try and negotiate a higher price or work to defeat the tender offer to maintain independence. It often comes down to a trade-off between money and control.

For shareholders, a tender offer may be appealing as a chance to cash out at a premium. But if they believe Startup X has a bright future, they may hold onto shares in hopes of even higher gains down the road. It's risky, but potentially very rewarding.

Tender offers are one tool companies use to gain ownership of other firms. For startups, it's important to understand how they work in order stay in control of your destiny. Build value, keep shares closely held, and always have an independence plan in case of unsolicited offers.

How to prepare your company for a tender offer

Once a tender offer has been announced for your company, time is of the essence. Here are some steps you should take immediately:

Prepare your communications plan. Figure out how and when you will notify employees, customers, partners and investors about the offer. Be transparent while also reassuring them about business as usual.

Review your options. Consider the offer carefully but also explore alternatives like remaining independent, finding another buyer, or negotiating a better deal. Get input from your board of directors and legal counsel.

Protect confidential information. Be extremely careful not to disclose trade secrets or other sensitive details that could be used against you if the deal falls through. Limit access to only those directly involved in the negotiations.

Assess your value. Have a solid understanding of your company's true worth to get the best possible deal. Look at metrics like revenue, growth, intellectual property, and competitive position in your industry. Don't leave money on the table.

Plan for various scenarios. Prepare for the tender offer to be accepted, rejected or countered. Develop strategies for operating as an independent company or integrating with the new owner. Hope for the best but plan for any possible outcome.

Stay focused on your business. While going through a tender offer process, continue to serve your customers, engage your employees and drive results. Don't get distracted from day to day operations which are the foundation of your company's value.

With the right planning and perspective, you can navigate a tender offer successfully and achieve the optimal outcome for your startup whether that means continued independence, new ownership or a lucrative acquisition. Stay strategic, act decisively and keep your company's best interests at heart.

Conclusion

So there you have it, a quick overview of what tender offers are and why they matter for companies. As a founder or investor, it's important to understand how they work and the implications they can have for ownership and control. While tender offers can be risky, they also present opportunities if managed properly. The key is staying informed, planning ahead, and working with experienced advisors who can help you navigate the process. At the end of the day, knowledge is power. Educate yourself on tender offers now before you find yourself in the midst of one without realizing how it happened. With the right knowledge and preparation, tender offers don't have to be quite so tender.

You've got this!