A Tale of Two Tender Offers

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the market of bulls, it was the market of bears, it was a period of expansion, it was a period of recession, we were awash in liquidity, we were buried in debt.

There were tender offers that appeared as plain as day.  It was clearer than crystal that tender offers could provide investors with opportunities. So I set forth with investments in Tribune Co. (TRB) and Navigant Consulting (NCI).

It was May 1, 2007. Sam Zell was offering cash for shares of Tribune Company, so I bought 99 shares for $32.76 per share.  The tender offer was set for $34.00 per share up to 126 million shares.  As you might have guessed by the number of shares I bought, odd lots (lots held by owners of less than 100 shares) would not be prorated if the offer was oversubscribed.  The result of this little transaction was beautiful.

On June 8, 2007, I found that $3,341.00 in cash had arrived in the Special Situations Real Money Port.  That was a net return of $90.81, which is a return of 2.8% after expenses.  That might look like a rather meager return, but it actually is a 26% average annualized rate of return since the transaction only took 39 days.  That’s right in line with the Special Situations Real Money Port internal rate of return.

The second tender offer began on May 10, 2007 when I purchased 85 shares of Navigant Consulting for $20.65.  I only bought 85 shares because thankfully I ran out of cash in the Special Situations Real Money Port.  Normally, I would have bought 99 shares for a tender offer with an odd lot preference in order to maximize my return. 

The Navigant Consulting tender offer was a modified “Dutch auction” with a price range from $22.50 to $19.50 per share. I usually try to avoid buying into tender offers when shares are trading significantly above the lower end of the tender price range.  However, I figured that I would be safe if I made my tender conditional on the offer being above $20.75.  I’ve observed that stocks tend to go up after tender offers are completed so I figured I would be safe if my tender was not accepted due to the condition I added.

Well, Mr. Market had other plans.  The market took are rather big tumble right before the June 7th expiration date for the tender offer.  The tender offer ended up significantly oversubscribed.  Everyone wanted to be cashed out of NCI it appeared.  The final tender offer ended up being for $20.50 so my shares were not accepted.  At the end, Navigant Consulting accepted for purchase 10,623,624 shares of its common stock at a purchase price of $20.50 per share.  Since the tender price was below my conditional offer, my shares were not cashed out.

Then something strange happened.  The price of Navigant Consulting shares plunged to $20.36 on June 8th and it is now trading around $20.  As of June 19th, I’m down 3.7% or $64.75 on this trade. 

This unexpected result for the Navigant Consulting tender offer caused quite a stir at Fat Pitch Financials Contributor’s Corner.  Shareholders could have gotten a better sale price just about anytime during the month of May.  This transaction was for 19% of outstanding shares, which is a larger than average tender offer.  Some members speculated that the resulting low offer was caused by the announced earnings that came in below trend just before the tender offer announcement.  Others thought that all the liquidity in the market is just looking for relatively safe opportunities like tender offers.  Are hedge funds and private equity now invading and overwhelming tender offers?  Maybe it was just folks ducking for cover as the market looked like it was starting a tumble. Join Contributor’s Corner if you want to jump into this conversation.

Two tenders, two very different outcomes.  One was for a large-cap company and for fixed price.  The other tender offer involved a mid-cap company and the offer involved a price range to be determined by a modified Dutch auction.  One was profitable and the other was not.  At the end, it was a wash.

It will be interesting to see how the next few tender offers work out.  It might be time for me to move back to focusing on going private transactions, but maybe this really does not mean anything given the results of the Tribune tender offer.  What do you think?

7 thoughts on “A Tale of Two Tender Offers

  • June 20, 2007 at 12:22 pm

    I’m not sure my comment is worth, even $0.02 as I have very little experience with tenders AND you were the one that introduced odd-lot tenders to me. That said, I see dutch auction tenders in two ways.

    1. They typically fall in the “too hard” category if the lower end of the offer range would cause me to lose money. (annualized losses work the same way as gains)

    2. Since everyone receives the same price on most of these tenders I don’t specify a price that I’m willing to tender at. Our votes (odd-lot types) won’t materially effect the acceptance price. This increases my chances of being tendered and limits exposure to Mr. Market.

    Your thoughts?

  • June 20, 2007 at 5:37 pm

    I too lost money on Navigant. It happens sometime.

    I’ve been investing in these for about the past three years, and have participated in a total of 71. Of these, I lost money in 9 of them, even when the shares were accepted for tender. On the Dutch Auction offers, I suggest that you wait as long as possible to buy, that way you’ve got less risk of a large price decline and you maximize your annualized return. Also, I usually tender my shares at the minimum price so that they will definitely be accepted. Often the post-offer market price is less than the price at which the shares were accepted. Overall, my returns on this arbitrage have been 3.3% over an average of 15 days, for an annualized return of 117%.

    My annualized returns on tender offers have been over twice as high as on going private transactions, with a shorter completion time and less risk. The downside to the tenders is that each transaction ususally has a smaller maximum than the going privates, but the going privates seem to have dried up.

    I like tender offers even though they are not risk free. Small (odd-lot) investors have an advantage over institutional investors in this arena. At the margin, the institutional investors drive the stock price. They face two distinct types of risk: the purchase price and the proration amount. The pre-tender stock price reflects both these risks. Odd lot shareholders, since we sometimes are not subject to proration, only face one of these two risks: the purchase price. Therefore, we are being compensated for a proration risk that we do not face. We can earn higher returns than the institutions and bear less risk. Effectively, we are beating the market.

    I think that these, the going privates, and microcaps are nice niches where there is an advantage to being small. Otherwise, most of my portfolio is in index funds.

  • June 21, 2007 at 12:00 am

    Thanks for sharing your thoughts. I agree that it is probably best in the future to avoid adding any price conditions when I tender shares.

    Chuck, I’m impressed by your experience with tender offers. I’m not exactly sure how many tender offers I’ve been involved in but it is no where near 71. I’m glad to hear that you’ve only lost money 9 times, which is about 13% of the time. I have been mentally factoring in about a 90% success probability for tender offers, so I guess I’m not too far off from reality.

    Chuck, I’m guessing that you don’t pay any fees for tendering your shares. What broker are you using?

  • June 21, 2007 at 6:48 am

    On dutch auction, you can always ask the broker to tender the shares at any price: If you are taking advantage of an odd-lot clause, that would be the wisest thing to do, making you avoid having a stock you never wanted to hold in the first place. Just my 2c
    Good luck
    Arbitrage Corner

  • June 21, 2007 at 10:32 am


    You’re right, I don’t pay any fees to tender. I use Fidelity and am a gold-level customer. I do a lot of trading. I’ve been participating in tender offers since the summer of 2004.

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