Tender Offer vs. Merger

A statutory merger (aka “traditional” or “one step” merger)

A traditional merger is the most common type of public acquisition structure. A merger describes an acquisition in which two companies jointly negotiate a merger agreement and legally merge.

Target shareholder approval is required

The target board of directors initially approves the merger and it subsequently goes to a shareholder vote. Most of the time a majority shareholder vote is sufficient, although some targets require a supermajority vote per their incorporation documents or applicable state laws.

Buyer shareholder approval required when paying with > 20% stock

An acquirer can either use cash or stock or a combination of both as the purchase consideration. An acquirer may also need shareholder approval if it issues more than 20% of its stock in the deal. That’s because the NYSE, NASDAQ and other exchanges require it. Buyer shareholder vote is not required if the consideration is in cash or less than 20% of acquirer stock is issued in the transaction.

Example of a merger (one-step merger)

Microsoft’s acquisition of LinkedIn in June 2016 is an example of a traditional merger: LinkedIn management ran a sell-side process and invited several bidders including Microsoft and Salesforce. LinkedIn signed a merger agreement with Microsoft and then issued a merger proxy soliciting shareholder approval (no Microsoft shareholder approval was required since it was an all-cash deal).

The primary advantage of structuring a deal as a merger (as opposed to the two-step or tender offer structure we’ll describe below) is that acquirer can get 100% of the target without having to deal with each individual shareholder – a simple majority vote is sufficient. That’s why this structure is common for acquiring public companies.

Legal mechanics of a merger

After the target shareholders approve the merger, target stock is delisted, all shares are exchanged for cash or acquirer stock (in LinkedIn’s case it was all cash), and target shares are cancelled. As a legal fine point, there are several ways to structure a merger. The most common structure is a reverse triangular merger (aka reverse subsidiary merger), in which the acquirer sets up a temporary subsidiary into which the target is merged (and the subsidiary is dissolved):

Source: Latham & Watkins

Tender offer or exchange offer (aka “two-step merger”)

In addition to the traditional merger approach described above, an acquisition can also be accomplished with the buyer simply acquiring the shares of the target by directly and publicly offering to acquire them. Imagine that instead of an acquirer negotiating with LinkedIn management, they simply went directly to shareholders and offered them cash or stock in exchange for each LinkedIn share. This is called a tender offer (if the acquirer offers cash) or an exchange offer (if the acquirer is offering stock).

• Main advantage: Acquirers can bypass the seller’s management and board
  One distinct advantage of purchasing stock directly is that it allows buyers to bypass management and the board of directors entirely. That’s why hostile takeovers are almost always structured as a stock purchase. But a stock purchase can be attractive even in a friendly transaction in which there are few shareholders, accelerating the process by avoiding the otherwise required management and board meetings and shareholder vote.
• Main disadvantage: Acquirers have to deal with potential holdouts
  The challenge with purchasing target stock directly is that to gain 100% control of the company, the acquirer must convince 100% of the shareholders to sell their stock. If there are holdouts (as there almost certainly would be for companies with a diffuse shareholder base), the acquirer can also gain control with a majority of shares, but it will then have minority shareholders. Acquirers generally prefer not to deal with minority shareholders and often seek to gain 100% of the target.

Two-step merger

Barring a highly concentrated shareholder base which would facilitate a complete 100% purchase in one step (workable for private targets with a few shareholders that can be directly negotiated with), stock purchases are affected via what’s called a two-step merger. The first step is the tender (or exchange) offer, where the buyer seeks to achieve a majority ownership, and the second step seeks to get ownership to 100%. In this step, the acquirer needs to reach a certain ownership threshold that legally empowers it to squeeze out minority shareholders (illustrated below).

Source: Latham & Watkins

Step one: tender offer or exchange offer

To initiate the tender offer, the buyer will send an “Offer to Purchase” to each shareholder and file a Schedule TO with the SEC with the tender offer or exchange offer attached as an exhibit. In response, the target must file its recommendation (in schedule 14D-9) within 10 days. In a hostile takeover attempt, the target will recommend against the tender offer. This is where you may see the rare fairness opinion that claims a transaction isn’t fair.

The buyer will condition their commitment to follow through with the purchase on reaching a certain threshold of target shareholder participation by a specified date (usually at least 20 days from the tender offer). Usually that threshold is a majority (> 50%), which is the minimum required to legally move to the next step without having to negotiate with minority shareholders.

Step two: back-end (or “squeeze out”) merger

Achieving at least 50% ownership after the tender offer enables the acquirer to proceed with a back-end merger (squeeze out merger), a second step which forces the minority shareholders to convert their shares for the consideration offered by the acquirer.

Long form merger

When more than 50% but less than 90% of shares were acquired in the tender offer, the process is called a long form merger and involves additional filing and disclosure requirements on the part of the acquirer. A successful outcome for the acquirer, however, is generally assured; it just takes a while.

Short form merger

Most states allow an acquirer that has been able to purchase at least 90% of the seller stock through the tender offer to get the remainder quickly in a second step without onerous additional SEC disclosures and without having to negotiate with the minority shareholders in what’s called a short form merger. 

“If a buyer acquires less than 100% (but generally at least 90%) of a target company’s outstanding stock, it may be able to use a short-form merger to acquire the remaining minority interests. The merger allows the buyer to acquire those interests without a stockholder vote, thereby purchasing all of the target company’s stock. This merger process occurs after the stock sale closes, and is not a negotiated transaction.”

Source: Thomas WestLaw

Notably, Delaware allows acquirers (upon meeting certain conditions) to do a short form merger with just majority (> 50%) ownership. This allows acquirers to bypass shareholder approval at the 50% threshold rather than 90%. Most other states still require 90%.