What is a covered tender?
A covered tender is an investment strategy in which an investor sells short part of the shares they hold in anticipation that all shares tendered will be accepted. This strategy is used to hedge against the risk of loss, should the takeover bid fail. The offer locks in the shareholder’s profit, regardless of the outcome of the tender offer.
Key points to remember
- A covered tender is a way to counter the risk that the offering company will reject some or all of an investor’s shares submitted in a takeover bid.
- A takeover bid is a proposal by an investor or a company to buy a specified number of shares of another company at a price above the current market price.
How a covered tender works
A covered bid is a means of counteracting the risk that the offering company will refuse all or part of an investor’s shares submitted as part of a take-over bid. A takeover bid is a proposal by an investor or a company to buy a specified number of shares of another company at a price above the current market price.
Bid covered as insurance
A covered bidding strategy or any type of cover, is a form of insurance. Hedging in a trading context or in a portfolio is the reduction or transfer of risk. Consider that a company may want to hedge against risk of changehe therefore decides to build a factory in another country to which he exports his product.
Investors hedge because they want to protect their assets against a negative market event that drives their assets down. depreciate. Hedging can involve a cautious approach, but many of the most aggressive investors use hedging strategies to increase their opportunities for positive returns. By mitigating risk in one part of a portfolio, an investor can often take on more risk elsewhere, thereby increasing their absolute returns while putting less capital at risk in each individual investment.
Another way to look at it is to hedge against investment risk means to strategically use market instruments to offset the risk of any adverse effects price movements. In other words, investors hedge one investment by making another.
Covered Tender Example
An example would be if an investor has 5,000 shares of company ABC. A acquiring company then submits a takeover bid of $100 per share for 50% of the target company when the shares are worth $80. The investor then predicts that in a tender for the 5,000 shares, the offeror would only accept 2,500 pro rata. Thus, the investor determines that the best strategy would be to short sell 2,500 shares after the announcement and when the stock price approaches $100. Company ABC then buys only 2,500 of the original $100 shares. In the end, the investor sold all the shares at $100 even as the stock price fell after the potential trade was announced.