When companies explore strategic consolidation, they are often faced with the decision to either pursue a merger or initiate a tender offer — two distinct pathways for combining corporate interests under a unified structure. A merger combines two entities into a single business after negotiations result in an agreement, while a tender offer involves the acquisition of one company’s shares by an acquirer that makes an offer to shareholders.
Determining the best option depends not only on what agreements the organizations can reach, but shareholder sentiment.
Companies may pursue such transactions for any number of reasons, including as a strategic avenue to streamline operations, to enhance market share, or to expand their footprint. Such corporate combinations present a range of complex considerations. Thus, when evaluating a tender offer vs. a merger to determine the best acquisition strategy, it is essential for companies and their stakeholders to understand the structural, regulatory, and financial distinctions between the two. This insight enables more informed decision-making and ensures alignment with broader investment and growth objectives.
Definition and Characteristics of Tender Offers
Whereas a typical merger involves companies negotiating an agreement to combine, a tender offer provides an acquiring company with the opportunity to circumvent the target’s management by making a direct appeal to shareholders. In circumstances where the goal is to gain control without the endorsement or cooperation of the target company’s existing leadership, the potential transaction might be referred to as a hostile takeover.
In a tender offer in which the target company is publicly traded, the acquiring company typically seeks to gain a majority stake — and reaching a 90% ownership threshold can facilitate a streamlined merger process under certain state laws.
Typically, the acquirer will make a public cash offer to all shareholders in the hopes they will be willing to sell directly to the acquiring party. These offers are clear in scope, with a defined sale price and limited time to decide. With an enticing offer, the acquirer may be able to purchase 100% of the company’s shares within a month or two, although this result is unlikely. In many circumstances, the acquirer gains enough shares to control a majority vote and then uses that leverage to “squeeze out” the remaining shareholders, compelling them to sell their shares at the offer price.
Investors or acquiring companies may opt for a tender offer for the following reasons:
- Failure to reach agreement for a traditional merger
- Wanting to complete the process more quickly
- Disagreement with decisions made by company management
- Interest in taking full control over the organization
Definition and Characteristics of Mergers
With a traditional merger, the acquiring and target companies take time — often months — to reach an agreement that meets the expectations of both businesses and regulatory guidelines. Types of mergers include:
- Conglomeration: Two unrelated businesses merge
- Horizontal: Mergers between companies in the same industry
- Vertical: Companies operating at different places in the supply chain merge
- Product Extension: Mergers between businesses with similar products
- Market Extension: Companies with similar products for different markets merge
A merger requires the companies to file documents with the U.S. Securities and Exchange Commission, wait for approval of their plans, then seek shareholder approval. The entire process may take months, depending on the size of the companies and any issues raised by the SEC.
Mergers can be advantageous for businesses of similar size that wish to increase their leverage or market share. Companies with similar business models might merge so that they can present a stronger front against competition. International companies may merge so that they can distribute their manufacturing and sales operations among a greater population. In some cases, mergers allow two unique businesses to combine efforts to provide more comprehensive products and services to their customers.
In a traditional merger, shareholder rights are preserved throughout the process, and corporate governance has a relatively smoother transition. With time to negotiate and consider the needs of each company, the merger can lead to a harmonious combination of businesses into one. If one of the boards is to be replaced, the process could be a gradual one that allows for the finding and positioning of effective replacements. But in some instances, negotiations may not be balanced — a larger corporation may have more advantages when merging with a smaller one.
Key Differences Between Tender Offers and Mergers
One major difference between tender offers and traditional mergers is the parties involved. With a traditional merger, each company also has personnel working to get internal approval. By comparison, a tender offer entails approaching the target company’s shareholders and enticing them to sell their shares directly to the acquiring party.
The acquisition methods also differ in terms of financial implications, legal considerations, shareholder rights, and corporate governance:
Financial Implications for Companies and Shareholders
Choosing between making a tender offer or executing a merger requires consideration of financial implications. Tender offers can be expensive for acquirers, especially if there are competitors. These types of acquisitions might also create financial instability for the company, especially if the completion involves a significant change in management or operations. In some cases, if a tender offer is perceived as a hostile takeover, it may create negative PR that could affect future business. Shareholders who feel squeezed out may become outspoken critics, a fact that underscores the importance of effective negotiation with shareholders during the process. The financial impact of a successful merger depends heavily on M&A valuation methods and other due diligence during the initial steps. Shareholders often retain their value with their shares exchanged for stock in the new company (in lieu of receiving cash for their shares). The success of the new company relies on a viable transition plan being well executed.
Legal Considerations and Compliance Requirements
Although acquisitions involving tender offers often are completed faster than traditional mergers, both methods must clear significant legal hurdles. For a tender offer, the acquiring company must submit relevant forms to the SEC. The target company is given 10 days to respond to the offer. The SEC may also review the offer paperwork and make comments, which could require an extension for the length of the offer period. If the tender offer is enticing enough to shareholders, the acquiring company may reach 90% share threshold typically needed to execute a short-form merger, which does not require the approval of the minority shareholders.
For a traditional merger, the companies issue a preliminary proxy statement to the SEC for review. Before notifying shareholders of the plan, they must wait for the SEC to issue any guidance or raise concerns. Once the filing is reviewed and any open issues are resolved, the companies can alert shareholders about an upcoming vote on the matter. If the companies gain shareholder approval (which may require a two-thirds majority, depending on company by-laws), the companies can take steps to complete the merger.
In either case, regulatory compliance and due diligence are paramount. The SEC may take actions to prevent or penalize companies that do not follow guidelines when attempting to acquire or merge. Each entity should perform due diligence to confirm that they understand the advantages and obstacles for any merger agreement or acquisition.
Impact on Shareholder Rights and Corporate Governance
Shareholder rights and corporate governance aspects also differ depending on the type of acquisition. With a tender offer, the governance of the target company may be subsumed or replaced by the acquirer. Shareholders either agree to sell their shares or risk getting squeezed out at the conclusion of negotiations. With mergers, on the other hand, leadership may be replaced, kept, or merged. Shareholders retain many of their rights, although there may be some dilution due to the larger number of outstanding shares.
In either case, transparency is critical during negotiations. Businesses are required by law to disclose information to shareholders. Disseminating this information also can help strengthen the case for an agreement — shareholders who have sufficient data about the offer or merger can make the right decisions for their specific investment scenarios.
DFIN’s Impact on Effective M&As
For both tender offers and mergers, a thorough knowledge of the process is key. These transactions carry notable risks and advantages, making a highly detailed process even more important to the decision-making protocol.
At DFIN, we specialize in services that help companies meet regulatory guidelines for major transactions. Contact an expert today to learn more about our M&A software.
