Tender Offers and Takeover Mechanics

Most acquisitions start with the acquirer negotiating directly with the target's board, which then recommends the deal to shareholders for a vote — that is a merger. A tender offer skips the board entirely: the acquirer announces publicly that it will buy shares directly from anyone willing to sell, at a stated price, usually a premium to the current market price, open for a set window (typically 20 business days under US rules).

The premium is the whole selling point. If a stock trades at $40, an acquirer might tender at $52 — a 30% premium — to make selling more attractive than continuing to hold. Shareholders who tender their shares (agree to sell) get paid the offer price if the deal closes; shareholders who don't are left holding stock in whatever the company becomes.

$$\text{Premium} = \frac{\text{Offer price} - \text{Pre-announcement price}}{\text{Pre-announcement price}}$$

A tender offer is friendly if the target's board supports it and recommends shareholders tender, or hostile if the board opposes it and the acquirer goes around them straight to shareholders, sometimes alongside a proxy fight to replace board members who are blocking the deal.

A worked example

A target trades at $40 before an acquirer announces a tender offer at $52, a 30% premium. The stock immediately jumps to $50 — not the full $52, because there is still some chance (regulatory blocks, financing falling through, a rival bid) that the deal never closes. That $2 gap is the arb spread; a merger-arbitrage fund buying at $50 and expecting the deal to close in three months at $52 earns roughly $2/50 = 4\%$ over the period if it closes as expected — an annualized return that has to be weighed against the probability the deal breaks and the stock falls back toward $40.