Hedged Tender

A financial strategy is implemented by investors when another company takes over or buys a public company.

Author: Adrian de Vernou
Adrian de Vernou
Adrian de Vernou
Adrian is a student at Colgate University pursuing a double major in economics and political science. During his gap year, Adrian interned with Wall Street Oasis and Tokenized Commodities Council where he published pieces on a variety of business, economic, and financial topics. He is a member of the Colgate Investment Group, Scholars of Finance, and Real Estate Club.
Reviewed By: Christy Grimste
Christy Grimste
Christy Grimste
Real Estate | Investment Property Sales

Christy currently works as a senior associate for EdR Trust, a publicly traded multi-family REIT. Prior to joining EdR Trust, Christy works for CBRE in investment property sales. Before completing her MBA and breaking into finance, Christy founded and education startup in which she actively pursued for seven years and works as an internal auditor for the U.S. Department of State and CIA.

Christy has a Bachelor of Arts from the University of Maryland and a Master of Business Administrations from the University of London.

Last Updated:December 23, 2023

What is a Hedged Tender?

Hedged tender is a financial strategy implemented by investors when another company takes over or buys a public company. The investors in the acquired company short-sell some of their shares, expecting only some tendered shares to be purchased. 

A tender offer refers to the offer proposed by the acquiring company on the one being taken over. An acquiring company will offer to buy shares during a specific term at a higher price than valued to convince investors to sell their shares.

Tender offers are also typically contingent on other factors. The company trying to buy the shares may place a contingency and state that it must own a certain percentage of the claims. Many contingencies also have a time limit or period for when the shares must be sold.

Given that companies rarely take over or buy 100% of another company's shares, there is a chance that investors will not accept any claims on sale. This is where the short-selling aspect is put into place.
If investors do not believe all tendered shares will be accepted, they can short the remaining shares. This hedges their position and mitigates their overall risk exposure during the company takeover.

Key Takeaways

  • Many tender offers are made internally, where companies make them for specific outstanding debt securities. In these cases, hedging tender is not possible, given that there is nothing to short-sell. 

  • Hedging tender is a risk prevention strategy during acquisitions of other companies.
  • Hedging, in all cases, is meant to protect investors from risk. Hedging tender is no different.
  • Aside from just protecting wealth, the hedged tender strategy during company acquisitions can mitigate risk and generate a profit in some instances.
  • The strategy provides stability to investors during aggressive and volatile takeovers.
  • In many cases, hedging is highly complex and involves multiple factors across financial sectors, from futures to options.
  • Given the complexity, rigorous calculations should be made before hedging. Even with this, there are still risks that predictions are inaccurate.
  • Finally, while hedging can mitigate losses, it can also reduce potential profits, minimizing gains for investors.

Understanding a Pro-Rata Tender Offer

Pro-rata is an essential aspect of the tender offer process that significantly impacts how investors choose to short their unacquired balance shares. In Latin, pro-rata means "in proportion." It ensures that each person receives their fair share of the pie.

Additionally, pro-rata calculations are used for many different reasons across the financial industry, not just for tender offers. These proportional calculations can be found when computing dividends or other shareholder payments.

Pro-rata calculations impact both the acquiring company and the investor. When buying a certain percentage of a company, the same percentage of shares offered must be brought against it. If the acquiring company buys 60% of a company, it will buy the same percentage of the shares provided by investors.

If an investor puts forward 1,500 shares, the acquiring company will likely accept 1,500 * 0.6 = 900 shares. The same is true for any percentage and number of shares. In this scenario, if 60% of shares are accepted, the investor would short-sell 40% of their claims.

Knowing how many shares will likely be accepted or not is an essential factor in how investors decide to implement the hedged tender strategy and short-sell their unaccepted shares.

Example of a Hedged Tender

The following is an example of a tender offer between 2019 and 2020. Although the deal did not go through, we can analyze how an investor would have utilized the hedged tender strategy in this real-world example.

In 2019, Xerox approached Hewlett-Packard in an attempt to merge the two companies. Hewlett-Packard rejected it, which led to Xerox pursuing a tender offer as it was also attempting to replace Hewlett-Packard's board. 

While part of the offer included Xerox stocks, the cash portion was priced at $22 per share, well over the $19.61 Hewlett-Packard stock that day. After the tender offer was announced, both company's share prices increased. 

An intelligent investor in Hewlett-Packard, the acquired company, would employ the hedged tender strategy to protect their money. They would first calculate how many tendered shares would be accepted pro-rata, then determine how many to short once the claims approach $22. 

As noted earlier, this specific deal fell through in March of 2020 due to the COVID-19 pandemic tanking shares of Xerox, which was a part of the tender offer. However, if the deal had gone through, an investor would have protected their wealth using the above strategy.

What is a Decreased Risk Exposure?

To understand how hedged tender decreases an investor's risk exposure during a tender offer, it is essential to understand what hedging is and how investors use it. 

The idea of hedging is to decrease risk exposure or reduce potential losses in any position. This can be done through various financial instruments such as stocks, bonds, options, swaps, futures, etc. While hedging may decrease potential earnings, it also mitigates potential losses.

When a tender offer is placed, investors in the company being taken over have the option to sell some of their shares to the acquiring company at a higher price than what it currently is on the market. The hedging takes place during this phase.

The acquiring company will not buy all of the investor's shares, given that shares are sold pro-rata. With this in mind, the investor tends all their shares and shorts the amount that will not get sold. 

Stock prices typically rise on the news of an acquisition. As it does, some of the investor's shares are sold, and the rest are shorted at the high price point. The investor has sold all their stocks if the stock price falls after the acquisition. 

The idea of hedging tender is to decrease risk exposure. Rather than just relying on selling some of the shares to the acquiring company and letting the price of the other shares get determined by the market, hedged tender minimizes the risk of losing money and protects the investment.

Researched and Authored by Adrian de Vernou LinkedIn

Reviewed and Edited by Krupa Jatania LinkedIn

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