The Return of the Tender Offer

Unused in friendly transactions for many years, the tender offer has returned as a viable—and in many cases superior—alternative to the single-step merger for strategic and private-equity acquisition structures. Indeed, the first six months of 2007 have seen at least 29 tender offers for U.S. targets with a market cap in excess of $200 million, compared with just 5 for the same period in 2006.

This resurgence was made possible when the Securities and Exchange Commission made amendments to the so-called “best-price rule,” which had severely limited tender offers. The return has been helped along by two other factors. The first is the now-demonstrated availability of financing for tender offer structures, which can be more complex than standard merger financings, especially for financial buyers. The second is the successful use in several recent tender offers of so-called “top-up” options, which significantly increase the likelihood that the buyer will be able to close the tender offer and short-form merger on the same day or within a few days. This reduces the risk that the buyer will be stuck for several weeks or months owning a majority, but less than all of the target.

Dealmakers have found ways to utilize the advantages of the tender offer structure to address deal problems that could not be resolved in the traditional merger structure. Examples include using a tender structure to obtain a timing advantage in a topping bid situation (ElkCorp, Mills); to reduce the ability of dissident stockholders to engineer “no” votes against the transaction (Biomet, Laureate Education); and to acquire a company that was not current in its financial reporting (for example, due to an options backdating problem) where an esoteric SEC interpretation of the proxy rules may have prevented the target company from holding a shareholder vote on a merger (SafeNet).

The specific potential advantages of a tender offer over a one-step merger structure include:

• Speed. A tender offer can be completed in as quickly as 20 business days from launch (or about five to six weeks from deal signing), compared to four months or more for a merger, which must be approved by shareholders at a special meeting following an SEC proxy review process.
  

• Risk reduction. The greater potential speed of the tender offer means a shorter period during which the target is exposed to market risk, MAC (material adverse change) risk and other non-consummation risks, and during which the buyer is exposed to third-party topping-bid risk.
  

• Potentially improved chances of obtaining shareholder approval.  Attempts by dissident shareholders to “hold up” friendly merger transactions by engineering “no” votes has been one of the major M&A developments of 2007. The tender-offer structure offers some advantages that may be useful in these situations.
  

• Securities law benefits. A company that is not current in its financial reporting (such as a company with an options backdating problem) can be the subject of a tender offer but, because of an SEC staff interpretation of the proxy rules, there is concern among M&A and securities lawyers that such a company cannot issue a merger proxy and therefore cannot hold a proper shareholder vote on the merger. The SEC staff has indicated an intent to alleviate this concern, but has not done so formally.
  

Of course, a tender offer is not appropriate for every acquisition. Margin rules, financing and regulatory considerations, and other factors may in many cases favor the traditional merger structure. (For example, in situations where it may take substantially longer to obtain antitrust or other regulatory approvals than to obtain shareholder approval, a single-step merger may be the preferred approach.) But a tender offer most certainly should be considered by both buyers and sellers alike as something much more than the structure of last resort.

Mark Gordon is a partner in the corporate department of Wachtell, Lipton Rosen & Katz.