The tender offer, a speedier mechanism to buy a public company, is being increasingly used to structure takeovers. But some caution that the route won't necessarily produce a top-dollar bid for shareholders.
Tender offers allow bidders to go direct to shareholders with or without support from a target company's board, as opposed to a merger, in which a buyer will typically negotiate an agreement with the target that is then subject to board and stockholder approval.
That makes tenders faster, with the time taken to complete a deal typically in weeks instead of months.
It diminishes the urgency to increase the bid in order to get the deal done -- so shareholders are not necessarily going to get absolutely the top dollar, said Anthony Sabino, professor of law and business at St. John's University. But ... it facilitates bids being made for a company that might otherwise be overlooked.
Other reasons cited to drive the popularity of tender offers include regulatory changes in 2006 that reduced the risk of buyers getting sued.
Of the U.S. takeover deals so far this year, 30 percent have involved tender offers, according to data from research firm FactSet MergerMetrics, with recent deals including private equity firm Sun Capital Securities Group LLC buying clothing maker Kellwood Co. That deal closed Wednesday.
Sixteen percent of deals were tender offers in 2007 and 8 percent in 2006. Other pending tender offer deals include private equity firm Warburg Pincus' bid to buy Lifecore Biomedical Inc and Hypo Real Estate Capital's bid for Quadra Realty Trust Inc.
One trend that FactSet highlights is the use of top-up options allowing buyers to further increase the likelihood of a deal closing quickly, which the research firm says have been written into 100 percent of all deals this year.
Top-up options give buyers the ability to acquire a number of newly issued shares in its target once they've had a certain percentage of shares tendered, helping them get past the 90 percent threshold needed to unconditionally close out a deal.
In an agreed tender offer, when more than 90 percent of the outstanding shares are tendered, the buyer can complete the deal without holding a shareholder meeting. But when less than 90 percent of the shares are tendered, a meeting has to be held. The top-up option makes it easier to get beyond 90 percent.
Duke University Law School Professor James Cox said his concern with tender offers is the absence of proxy advisory opinions, with proxy advisory firms such as Institutional Shareholder Services and Glass Lewis not typically weighing in on tender offers.
The downsides of (tender offers) is that they don't provide the opportunity for ISS and Glass Lewis to give an indication of whether the transaction is good or bad, said Cox. The top-up shortens the whole time dimension. The reason they do a top-up is so they don't have to ... have some kind of delay and a shareholder meeting and have to do a straight merger, which lends itself to attack in the Delaware courts.
Jack Bodner, partner at Covington & Burling, said a top-up option clearly benefits the buyer in helping close a tender and execute a deal; but he said it doesn't take any rights away from the shareholder.
From a shareholder's perspective, once the minimum condition has been met in a tender offer, it's a fait accompli that the merger will occur and it's just a question of how much time it will take, Bodner said. So the top-up option speeds that up but doesn't take away from any rights the shareholder would otherwise have.
While concerns exist, the use of tender offers is expected to continue to rise. One argument is that the speed factor can help avoid a material adverse change or MAC clause.
A deteriorating economy has contributed to a rising number of scuppered deals, in which buyers have argued that a target's value has deteriorated under such a clause.
A tender offer can close much more quickly, so the risk of a MAC occurring over the period is reduced, said Bodner.