July 10, 2007
The Return of the Tender Offer
The tender offer is starting to make a come-back. According to MergerMetrics.com, in the first five months of 2007, 15.5 percent of negotiated transactions were accomplished through tender offers. While that is a low figure, it is more than three times higher than in the same period last year.
The tender offer is likely reemerging due to the SEC's amendments to the best price rules which took effect on December 8, 2006. These amendments clarified that the best-price rule does not cover employee compensation, severance or other employee benefit arrangements. Previously, there was a circuit-split on this issue, and many bidders preferred merger transactions in order to avoid litigation and potential liability over the issue.
But the 15% figure is still a low one. Perhaps one reason why is the increasing use of go-shops in private equity deals. In cash deals, tender offers have a timing advantage over mergers. Tender offers can be consummated in 20 business days from the date of commencement compared to 2-3 months for a merger. However, if a go-shop is utilized the timing advantage of a tender offer is lost due to the need for the 45-60 day go-shop period. Accordingly, in this case a merger is likely a preferable option because it assures that minority shareholders can be entirely squeezed out in the merger provided the necessary number of shareholders (typically 50%) approve the merger. This compares to a tender offer, where if 90% of shareholders do not tender the squeeze-out threshold is not reached, and a back-end merger must still take place making the process longer than a single-step merger.
To address this last issue, transaction participants are adding top-up provisions to tender offers. A top-up provision provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold. The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules. And according to MergerMetrics.com, in 2007 more than two-thirds of negotiated tender offers included a top-up agreement, up from 55.6 percent in 2006 and more than double the number in 2005 and 2004.
Expect the number of cash tender offers to increase as practitioners again become re accustomed to the structure. Also expect exchange offers to reappear. The SEC took steps in the 1999 M&A Release to put stock and cash tender offers on parity by permitting pre-effective commencement of exchange offers. But despite expectations of its widespread use, the exchange offer never caught on in friendly transactions. This was likely due to the same reasons for the decline in cash tender offers (exchange offers are also a terrible amount of work in a very compressed time for M&A lawyers). But with the new SEC rules, this transaction structure is one worth exploring for acquirers who want to quickly consummate friendly stock transactions.
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