Wednesday, September 8, 2010

Open Offer

What is Open Offer?
An open offer is an offer made by an acquirer to buy a fixed quantity of shares, when his stake in the target company crosses certain pre-defined limits. In case of takeovers, an open offer can be an exit opportunity for existing shareholders
as the offer price is usually at a premium to the prevailing market prices.

When would an open offer be triggered?
~ If an entity’s stake in a company crosses 15% of the total shares outstanding, then he needs to make an open offer for a further 20% of total shares outstanding.
~ If an acquirer has 15% or more but less than 75% of shares, to get more than 5% of the voting rights of the company in a year, the acquirer needs to make an open offer for further 20% of shares of target company.
~ An acquirer, who already has a stake of 75% or more in a company, can acquire further shares only through an open offer from the shareholders.

Regulatory View
● SEBI's (Substantial Acquisition of Shares and Takeovers) Regulations, 1997: Provides regulations and suggests measures to protect interest of the investors.
● If the shares received by the acquirer under the offer were more than the shares agreed to be acquired by him, the acceptance would be on a proportionate basis.
● After the public announcement of open offer, it should be opened on or before 55 days. The open offer is kept open to the public for a period of 21 days.

How does one determine the offer price?
SEBI does not decide or approve the offer price. The acquirer is required to ensure that all the relevant parameters are justified in the offer, which are
● The highest price at which the acquirer has acquired the shares of the target company as per the agreement.
● If the target company is frequently traded, then the average of weekly high and low prices of shares is taken for 26 weeks or during two weeks prior to the date of the Public Announcement, else the fundamentals of the company are
● In case of abnormal cases, amendments of regulations are expected from SEBI to deal with pricing issues. (Ex. Satyam Computers)

How can an investor benefit?
● Short-term players might enter for arbitrage when the market price of the stock is lower than offer price, and exit the stock before the close of open offer, as there is a possibility of share price moving towards the offer price.
● If the acquirer is accepting more number of shares, then there is a greater possibility that the shares tendered by the investor would be accepted under the open offer.

More Importantly - The Conclusion:
An investor can benefit under an open offer, as it is an opportunity for him to exit his position in a stock, at a price that is usually higher than the prevailing market price. Short-term traders can also benefit from the arbitrage opportunity in the
open offers as the stock price usually moves closer to the offer price, once the company announces an open offer.

However, if the number of shares tendered by the investors were more than those available under the open offer, the company would acquire the shares on a pro-rata basis. Also there is a risk of a steep fall in the share price once the open
offer concludes. As a result, the investor could end up having to sell the unaccepted stock at lower prices.

On the tax angle, both short-term investors and long-term investors are taxed with the applicable tax rates as open offers are treated as off-market transactions (hence the lower capital gain taxes that are applicable for normal investors in the market would not be applicable to the gains made by submitting the shares in an open offer).

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