Tender Offer Proration: How It Works, With an Example

You tendered 5,000 shares at $25 and the confirmation says 3,101 were bought. The other 1,899 are on their way back. That gap is proration: when holders offer a company more shares than it said it would buy, it takes an equal fraction from every qualifying holder, after first buying any odd lots in full, and returns everything else. The fraction is simply the shares the company still wants divided by the shares competing for them. Your own fill is your tender times that fraction, rounded the way the offer document says.

Why doesn’t the company just buy everything?

The offer sets a cap. A company announces how many shares, or how many dollars’ worth, it will buy, and the terms in the offer to purchase hold it to that figure. Turning up in numbers can’t change it.

An offer stated in dollars converts into shares at the offer price. At $25, a $250,000,000 offer buys 10,000,000 shares, and that share figure is the target the proration sum works from. In a Dutch auction the conversion waits for the clearing price.

The cap binds differently in the two common formats. In a fixed-price offer every share tendered qualifies at the one price, so proration begins the moment the total passes the target. In a Dutch auction only shares tendered at or below the clearing price qualify, and proration applies to that group; the clearing-price side is worked through in how a Dutch auction tender offer works.

How is the factor worked out?

Take a hypothetical fixed-price offer for 10,000,000 shares at $25. When it expires, holders have tendered 16,000,000 shares. Of those, 200,000 are odd lots, tendered by holders who owned fewer than 100 shares and sent in every one, and the offer buys those in full.

Odd lots leave both sides. They come out of the slots and out of the pile, which is easy to forget when you redo the sum from a press release that gives only the totals.

What does one holder get back?

Apply the factor to your own tender. Then round.

The half share disappears. The example rounds down to a whole share, and the offer document sets the actual rounding, so read its section on proration before you redo the sum for your own tender. A holder who tendered 500 shares gets the same 62.03% treatment, and so does one who tendered 500,000.

Redo the sum when the confirmation arrives. Multiply what you tendered by the final factor, round the way the offer says, and set the result beside the number your broker reports as accepted, since a mismatch is far easier to raise while the offer’s paperwork is fresh than weeks later, after the returned shares have been sitting in the account. A one-share gap may just be rounding.

You had expected to sell 5,000 shares and you sold 3,101, which leaves 1,899 shares in the account at whatever the market pays for them after the offer, and nobody can tell you in advance whether that price will sit above or below the $25 the company paid for the rest. Check the quote page before you count on either.

Why do odd lots go first?

Small remainders are a nuisance. Prorating a 60-share tender at 62.03% would buy 37 shares and hand back 23, an awkward remainder for the holder to sell later and for the company to keep on its register. So many offers buy the tenders of holders with fewer than 100 shares in full, provided they tender all their shares, and prorate everyone else.

That priority isn’t free for the larger holders. Run the same offer without it and the factor comes out a little higher.

That’s 24 shares on a 5,000-share tender. The gap widens as the odd-lot pile grows.

When will you know the number?

Not at expiration. The company announces a preliminary proration factor soon after the offer expires, and the final factor follows a few days later, once the depositary has checked every tender. Payment and the return of unaccepted shares come after the final count.

The two can differ. Conditional tenders are one reason. A holder who tendered on condition that a minimum number of shares be bought may find the factor cuts below that minimum, in which case those shares fall out of the pool, and with fewer shares competing for the same slots the factor for everyone else moves. The offer document says how conditional tenders are treated when that happens, so the preliminary figure is an estimate you should hold loosely until the final press release lands.

What should proration change about your order?

Mostly, your expectations. If you want out of a position, a tender may get you out of only part of it, and you won’t know which part until after the window closes. Treat the returned shares as a live position. The checklist for whether to tender shares in a Dutch auction goes through the price choice, the conditional and odd-lot boxes and the broker’s cutoff in order.

It also helps to know what the returned shares are worth to you. Valuing them is the same job as valuing any holding, and the lesson on valuation multiples covers the ratios you’d use. For the company’s side, the 10,000,000 retired shares shrink the count that earnings are spread over, and the buyback EPS calculator shows what that does to earnings per share once you put in the share count and net income.

Expect a cut whenever the offer looks popular.