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.

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?

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.

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?