What’s a Dutch Auction Tender Offer and How Does It Affect Me?

Public companies sometimes hope to increase the price of their shares by conducting something called a stock buyback.

A buyback means that the company purchases a large amount of its own shares from existing investors. By doing that, it hopes to increase the value of its remaining shares in the market by decreasing the supply, potentially rewarding existing shareholders with a higher stock price.

There are a number of ways that companies can buy back their own shares. 

One quick way is through what’s known as a tender offer. In this scenario, the company can potentially buy back its own shares by setting a fixed price, and then “tendering” that offer to existing shareholders. Often that offer will be at a premium to the existing stock price–meaning the company will offer to purchase shares at a higher price than the current price of shares on the market, which serves as an incentive for investors to sell. Investors then have the option to either accept or reject the offer.

But there’s another type of tender offer, called a Dutch auction tender offer. (The name comes from the Dutch tulip market of the 17th century, where the tactic appears to have originated.)

Here’s how a Dutch auction tender offer works. A company will decide to purchase a set dollar amount of shares from existing investors. But instead of setting a fixed price, it will set a range. Investors can then bid on the range of prices to sell their shares. 

Here’s the thing. Investors are not guaranteed a sale at the highest price—or any price for that matter. The company can’t exceed the total dollar amount it set for the share repurchase. The company will typically multiply the number of shares offered at the lowest price, and if the total dollar amount for the share repurchase isn’t met, it will jump up successively to the next highest bid prices to meet its threshold amount. Ultimately, investors will receive something close to the average between the highest and lowest bids.

How a Dutch auction tender offer works

It can get pretty complicated, but let’s look at a simplified example to help illustrate how a dutch tender offer works. 

Let’s say that a fictional company called ABC Widgets conducts a Dutch auction for $10 million worth of shares, and it sets a price range between $10 and $15 for each share. Let’s assume that investors offer 500,000 shares at $10. At that amount, it means ABC would only meet half its sale threshold, at $5 million. (500,000×10=5 million). Now let’s say that the next batch of investors offers 400,000 shares at $12.50, worth another $5 million (400,000X12.5= 5 million), bringing the amount to the $10 million it has allotted.  

ABC would end up purchasing those shares.  However, if other shareholders offered to sell their shares above $12.50, ABC would not buy those shares, as those shares would exceed its aggregate sale amount. 

ABC would essentially buy the shares at a weighted average price between the high and low ranges that meet its $10 million purchase price. (A weighted average is similar to an average, except that it weights some of the data points more heavily than others.)

Although the company will set its auction range at a premium, or higher than its existing share price, it can potentially save money on the share repurchase by buying some shares at the lower price, and others at higher prices. Investors have an incentive to sell by potentially benefiting from a sale at a higher price than the lowest one in the auction range.

Good to know:  Often, companies will create something called an odd-lots provision. That’s for investors who own very few shares, typically fewer than 100. The odd-lots provision ensures that all of the shares are purchased at the prevailing price following the auction.

Something else to think about: A company that conducts a Dutch auction tender offer will typically do so over a set period of time, generally between one to two months. It is not required to complete the offer, and can cancel it at any time.

Stash and Dutch Tender Auctions

Stash allows investors to purchase fractional shares. Fractional shares may not be purchased in some tender offers. Some tender offers have an odd-lots provision for holders of fewer than 100 shares, meaning your shares will be sold at the prevailing price.