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