A Warning About Mini-Tender Offers

On May 1, I received an e-mail from my brokerage indicating that there was a "non-mandatory/reorg tender" offer for shares of General Dynamics (GD), a stock that I own. The e-mail was a form letter with no details about the offer, so I was in the dark about it. On May 4, General Dynamics issued a press release that provided some insight. A firm called TRC Capital was seeking to purchase up to 2 million shares of GD directly from shareholders; however, their offer price of $66.95 was 4.4% below the price at which GD was trading at the time of the offer ($70.06). Not surprisingly, General Dynamics recommended that shareholders reject the offer. I had no intention of parting with my GD shares anyway, so I ignored the offer and no action was taken.

I did some searching and found out that this was a "mini-tender offer" and that TRC Capital frequently makes them. In a nutshell, it is an offer to buy less than 5% of a company's outstanding shares directly from shareholders, typically below market price. If a shareholder tenders his shares to the offering firm, then the firm can turn around and sell them immediately on the open market, booking a nice little profit (because the current market price is higher than the offer price). If the market price happens to fall below the offer price, which is actually what has happened with GD, then the firm does not have to buy any tendered shares, yet the shares can remain "locked up" and bought later by the firm when the market price rebounds. If this sounds like a lousy deal for shareholders, that's because it is! The firm is basically hoping that ignorant shareholders will tender their shares without bothering to read the terms of the offer and without realizing that they are likely getting a below-market price for their shares. Surprisingly, this unscrupulous practice is legal.

If you ever receive an offer to tender your stock in a company, the first thing you should do is contact your brokerage and/or the company in question to find out the terms of the offer and be sure to read the fine print. If the firm making the offer is seeking to acquire less than 5% of the company's outstanding shares, then that is a red flag and indicates it is a mini-tender offer. It is likely to be a bad deal for shareholders, so my advice is to reject the offer (you probably will not have to take any action; you can simply ignore the offer). In contrast, if the offer is more legitimate (e.g., the entire company is being acquired), then it should be obvious in the offer details and you will likely be offered a premium over the current market price for your shares. Regardless, an investor should always fully investigate an offer to determine whether it is in his best interests.

For more information, see the SEC page about mini-tender offers and a great article from Investing Daily that discusses these offers and provides background on TRC Capital.