Tender offers are pretty common in the investment industry, but odd lot tender offers are more rare.
While both can provide a good return over a short period of time, one provides a unique opportunity for small retail investors, allowing them to collect some easy cash in a short period of time.
So, what exactly are odd lot tender offers and how should you approach them?
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What is an odd lot tender offer?
An odd lot tender offer is a sort of tender offer that gives preference to people who tender a small number of shares - essentially 99 or fewer.
A tender offer happens when a company or a third party makes an official offer to purchase shares from shareholders for a specified price. This is known as the offer or tender price. After a tender is made, investors can instruct their broker through their trading platform to submit their shares to be tendered for sale to the buyer.
Not all shares that are tendered will usually be purchased, however. Typically, a company or 3rd party buyer will tender for a fixed number of shares – say 50,000 – and then purchases will be made up to that number of shares.
If more investors want to tender their shares than the buyer is looking to purchase, investors who tender their shares may only have a portion of those shares purchased by the buyer.
In an odd lot tender, however, shareholders who tender 99 shares or fewer will have their shares purchased first before the purchaser moves to purchasing shares from those tendering larger blocks.
Odd Lot Tender Offers Vs Regular Tender Offers
An odd lot tender differs from a regular tender offer by giving preferential treatment to those investors who are tendering 99 shares or fewer. In an odd lot tender offer, a purchaser will give preference to “odd lots” (blocks of 99 or fewer shares” while determining the number of shares to purchase from each tendering shareholder, so the entire odd lot being tendered is purchased before any other purchases are made.
In a regular tender, on the other hand, a tenderer will purchase an equal number for each tendering shareholder, and the number of shares purchased from these shareholders may be greater or fewer than the number of shares they tender to the buyer.
What’s the best way to approach an odd lot tender offer?
Everyone has their own preference for how to approach an odd lot tender offer, but my strategy is to wait for the tenders for stocks that have a higher quoted price and that offer a good spread between their market price and their tender price.
The two objectives are important to me. First, a larger share price means that I can put more money to work in an arbitrage. Second, the larger the spread between the market price of the shares and the offer or tender price, the more money I can make per arb.
For example, Monster Beverage previously tendered for their shares and gave an odd lot preference. Shares were trading for roughly $50 but the company was offering roughly $55 for each share tendered (I’m going from memory here, so take this as a working example rather than a historical document) – a 9% spread. By buying 99 shares for $4950 ($50ea), I could then turn around and immediately tender them for $5445 ($55ea), pocketing $495 in the process.
With tender offers, you only ever earn enough for a good night out… and some spreads are so thin that the event is not worth pursuing. If shares had a price of $1 and a spread of 9% from their $1.09 tender price, for example, I would have only been able to make just under $9 on the deal. That doesn’t even cover trading costs.
How to lose money on an odd lot tender offer
Nothing is free in life, though – and that goes doubly for the markets. So, there are risks that an investor has to keep in mind when approaching an odd lot tender offer.
First, there’s the risk that the tender could be called off. In some cases, a company that announces a tender may call off the tender. This can have a negative effect on the stock price.
For example, if Monster was trading for $45 before the tender offer was announced and then rose to $50 after the announcement if the company canceled the tender offer then it may fall back to $45. Anyone who bought at $50, sadly, would be out $5 per share. Rather than make $495, they could lose the same amount.
Second, investors new to this approach may pursue deals that don’t offer a large enough profit to cover trading costs. It can take – say – $25 to purchase a block of shares. If your arb only promises you $25, then, you would come out with a loss. If you forget to set a limit order and come out a bit higher on your purchase price, you could see a much smaller profit, and then lose money on the transaction.
Third, a company tendering for its own stock can drop the odd lot preference after the announcement… so even if you purchased and tendered 99 shares of stock, you may find that the company only purchases 70 shares, and the remaining shares sink in price after the event, eroding your profit.
Tender offers are not risk free, and odd lot tender offers are no different. Off lot tenders are indeed much lower risk than almost anything else you can do with regards to special situations in the stock market. Still, you need to make sure that you are utilizing a sound approach before you proceed with any trade.
Tender offers are also tough to find. While tender offers are made frequently, it’s much rarer to see an odd lot tender offer. We spend a good amount of time each month scanning for these and sending them out to free subscribers.
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