An investor owns 100 shares of XYZ common stock. XYZ announces a tender offer for 30% of its outstanding shares at a price significantly above the current market price. If the investor tenders all 100 shares, and the offer is oversubscribed, how many shares will the investor likely sell?
- AA pro-rata portion of their tendered shares, likely less than 100.
- BAll 100 shares, as the investor tendered them.
- C0 shares, as the offer will be withdrawn if oversubscribed.
- D30 shares, as the offer is for 30% of outstanding shares.
Show answer & explanationAnswer & explanation
Correct answer: A. A pro-rata portion of their tendered shares, likely less than 100.
In a tender offer that is oversubscribed, the company typically accepts tendered shares on a pro-rata basis from all shareholders who offered to sell. This means the investor will likely sell a percentage of their tendered shares, not necessarily all of them, and not a fixed amount like 30% of their holdings unless their holdings happen to match the pro-rata percentage.
Why the other options are wrong
- B. If the offer is oversubscribed, not all tendered shares can be accepted; a pro-rata allocation is standard.
- C. Tender offers are typically not withdrawn just because they are oversubscribed; pro-rata acceptance is the common method.
- D. The 30% refers to the total outstanding shares the company wants to buy, not necessarily the percentage of each individual's tendered shares that will be accepted.
Tender Offer
An offer by a company or an outside investor to buy some or all of the outstanding shares of a company, usually for a premium over the current market price. If oversubscribed, shares are typically accepted on a pro-rata basis.
- Offers to buy shares directly from shareholders.
- Often at a premium to market price.
- If oversubscribed, shares accepted pro-rata.
- Shareholders can choose to accept or reject.
Memory trick: Tender: 'T'ake or 'E'ject, but 'N'ever 'D'efy 'E'qual 'R'atio.