Hedged tender


An investor sells a portion of a stock holding short a tender offer in the anticipation that not all shares tendered will be accepted. For example, investor Q has 5000 shares of XYZ. An acquiring company makes a tender offer of $100 a share for 50% of the target company when the shares are currently worth $80. Investor Q anticipates that if he or she tenders all 5,000 shares, only 2,500 will be accepted by the bidder pro rata. Investor Q therefore short-sells 2500 shares after the announcement and the price of the stock has approached $100. Company XYZ purchases only 2500 of the original shares at $100. Investor Q has sold all shares at $100 even as the price of the stock drops on a post-news dip.

Investing Essentials

Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

Term of the Day


Describes an investor who, when faced with two investments with the same expected return but different risks, prefers the one with the lower risk.

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