How Should Investors Respond to Tender Offers?

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Tender OfferMy interest in this topic was piqued when I was asked to review a tender offer received by one of our clients. The notice of this tender offer began, as all do, with a half-page summary description written in language that only a legal technocrat or an engineer who failed his English classes would deem sufficiently clear for a lay investor. Even if you request a copy of the full description (this one was 56-pages), you can assume that the information most helpful to make an informed decision is carefully excluded.

In a tender offer, the acquirer attempts to purchase a majority but not all of a company’s outstanding stock. Once majority control is established, the new owners can typically complete a merger to force a buyout of the remaining shares.

In this case, a large private equity firm, Harkland Clarke Holdings Corp., is aiming to buy a publicly traded midwestern direct-mail advertising company, Valassis Communications (VCI). You may be most familiar with Valassis as the marketing company that distributes the “Have You Seen Me?” missing children notices. The direct-mail business is in the midst of an industry-wide shakeup, thanks in part to the lower costs of Internet advertising. It is easy to understand why a midsized company would benefit from consolidation.

As I researched this offer further, the story became more complicated. The purchasing company is led by Ronald Perelman, one of the more controversial titans of Wall Street. He is as well known in the press for his legal battles with his many ex-wives as he is with his often aggressive business tactics.

In researching this issue, I also found that a large legal settlement is still unresolved and may lead to a $500M cash inflow to Valassis for anticompetitive infractions by competitors. If the buyout goes through, shareholders will lose all rights to this possible settlement.

Then there are the lawsuits that are beginning to spring up over this deal on behalf of concerned shareholders. A suit filed by a Louisiana municipal police pension fund asserts that the Valassis CEO and CFO, who are set to reap multimillion payouts when the company is sold, held secret meetings with Perelman’s cohorts and failed to open the bidding equally to other bidders. The suit also presumes that Valassis’s top brass may also have received promises of future employment and financial provision from Perelman’s private equity firm after the deal goes through.

On the other hand, Fortune reporter Erika Fry asserts that this Louisiana pension fund is a “litigation monster” that partners with scores of plaintiff attorneys looking to sue scores of giant companies. After reading the article, you have to wonder if these lawsuits are in the best interests of the shareholders or the law firms that take home the largest cut of a class action suit.

If this company is worth far more than Perelman’s private equity firm is willing to pay for it, how come the price jumped 22% the moment this buyout offer was made public in December? Why wouldn’t alternative buyers announce their own offers?

After hours of researching this tender offer, I was more confused than I was before reviewing the initial one-page notice, which is often the case. Unless you own more than 1% of company stock, you are typically better off ignoring tender offers. And not just because it saves time. Ignoring a tender offer means that you are withholding your shares from the purchase offer.

By the time the offer has been made, the economic premium has already been factored into the now higher stock price. Reviewing and accepting tender offers typically require substantial time and offer little if any additional reward.

Additionally, we believe it’s best to assume that Perelman or the respective financial insiders perceive an unusually rosy economic opportunity to buy your shares or they wouldn’t be making the offer. Technically, the board of directors is supposed to be protecting your interests and only entertain a sale when it bests all other alternatives. However, the board tends to be more passively involved in these deals than the purchasing company, which has more to lose with a poor investment.

And lastly, an individual investor’s vote is usually totally inconsequential relative to the larger institutional investors. A bucket of water will not change the direction of the tide. We generally prefer to invest through mutual funds and exchange-traded funds (ETFs). Aside from the low-cost diversification benefits, you also get the insight of members of corporate governance teams who vote these issues on your behalf.

RULE OF THUMB: Ignore tender offers. Spending time researching every tender offer is an act of financial futility that is best avoided by the wise investor.

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Matthew Illian was a Wealth Manager at Marotta Wealth Management from 2007 to 2016. He specialized in small business consulting, college planning, and retirement plans.