The two-tier tender offer

Under a two-tiered tender offer, an acquirer offers a better deal for a limited number of shares of the target company that it wishes to purchase, such as a higher proportion of cash or a higher price per share. This initial tier is designed to give the acquirer control over the target company. The acquirer then makes a reduced offer for an additional group of shares through a second tier that has a later completion date. The intent of this approach is to reduce the total acquisition cost for the acquirer.

For example, an acquirer may offer $50 per share for only enough shares to assure the acquirer of majority control of a business, after which only $35 is offered per share for all remaining shares.

This approach has two benefits from the perspective of the acquirer:

  • Cost. The overall cost of the tender offer is reduced, in comparison to a single tender offer at a higher fixed price.
  • Timing. The shareholders of the target company will be more likely to proffer their shares more quickly, in order to avoid being placed in the second tier and receiving an inferior compensation package at a later date.

The two-tier concept is not considered beneficial to shareholders, since they are essentially being stampeded into accepting the deal immediately, or of being at risk of receiving a lower payout.

It is possible for a company that believes itself to be a potential target to offset the dangers posed by a two-tiered tender offer by making two key changes to its corporate bylaws. These changes are:

  • Fair price provision. This provision requires an entity bidding for a majority of a company’s stock to pay at least the fair market price for the stock held by minority shareholders. There are a variety of ways to calculate the fair market value, such as a fixed amount, the market price paid within a certain date range, or the maximum price paid by the acquirer for other shares.
  • Redemption rights. This provision gives shareholders the right to force a redemption of their shares under certain circumstances (such as a change in control of the business). The redemption price or pricing formula can be included in the provision.

The use of fair price provisions and redemption rights, as well as restrictive laws passed by some states, has limited the use of two-tiered tender offers. Nonetheless, it is an option worth consideration by the acquirer if the target company has not included the appropriate defensive provisions in its bylaws and there are no state laws barring its use.

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