What is the covered offer
A covered tender is an investment strategy in which an investor sells part of the shares he owns short, anticipating that all the shares tendered will not be accepted. This strategy protects against the risk of loss in the event that the offer is unsuccessful. The offer locks in the shareholder’s profit, regardless of the result of the takeover bid.
BREAKDOWN OF THE COVERED OFFER
A covered call for tenders is a way of countering the risk that the company offering the offer will refuse all or part of the actions of an investor which are submitted in the context of a takeover bid. A takeover bid is a proposal by an investor or a company to buy a specified number of shares in the shares of another company at a price higher than the current market price.
An example would be if an investor owns 5,000 shares of ABC company. An acquiring company then submits a takeover bid of $ 100 per share for 50% of the target company when the shares are worth $ 80. The investor then anticipates that in an offer of all 5,000 shares, the bidder would only accept 2,500 pro rata. Thus, the investor determines that the best strategy would be to sell 2,500 stocks soon after the announcement and when the share price approaches $ 100. Company ABC then bought only 2,500 original shares at $ 100. In the end, the investor sold all the shares for $ 100 even though the share price fell following the announcement of the potential transaction.
Offer covered as insurance
A covered tender strategy, or any type of cover, is a form of insurance. Hedging in a commercial context or in a portfolio consists in reducing or transferring risk. Consider that a company may want to hedge against the exchange risk, so it decides to build a factory in another country to which it exports its product.
Investors cover themselves because they want to protect their assets from a negative market event that would cause their assets to depreciate. Hedging may involve a cautious approach, but many of the more aggressive investors use hedging strategies to increase their opportunities for positive returns. By mitigating risk in one part of a portfolio, an investor can often take more risk elsewhere, increasing their absolute returns while putting less risk capital in each individual investment.
Another way of looking at it is to hedge against investment risk by strategically using market instruments to offset the risk of adverse price movements. In other words, investors cover one investment by making another.