Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
A client holds shares of a company that is being acquired by another company. The acquiring company offers to purchase the target company's shares directly from the shareholders at a premium to the current market price. This corporate action is known as a(n):
- ASpin-off
- BRights offering
- CStock split
- DTender offer
Show answer & explanationAnswer & explanation
Correct answer: D. Tender offer
A tender offer is a public offer made by one company (the acquirer) to all shareholders of another company (the target) to purchase their shares at a specified price, usually at a premium over the current market price, for a limited period. This is typically done to gain control of the target company.
Why the other options are wrong
- A. A spin-off is when a company creates a new independent company from an existing division, distributing its shares to current shareholders.
- B. A rights offering allows existing shareholders to buy new shares, usually at a discount, to maintain their proportionate ownership.
- C. A stock split alters the number of shares and price, not an acquisition method.
Tender Offer
An offer made by an acquiring company to the shareholders of a target company to buy their shares at a specified price, typically above the current market price, within a set timeframe. The goal is often to gain control of the target company.
- Public offer to buy shares directly from shareholders.
- Usually at a premium price.
- Has a limited acceptance period.
- Aims to acquire control of a target company.
Memory trick: Acquisition: Tender for shares, Merger for companies.