M&A Special Situations: The (not so) Lucrative Details of Odd-Lot Tenders

Brief Overview of Tender Offers:

On occasion, company’s buyback shares by way of tender offers, these allow them to purchase a defined number of shares at a set price. Companies often choose buyback through tender rather than over the open-market as they can purchase a significant number of shares without moving the market price above the set tender amount. Companies also use tender offers to buyback bond issues and to give holders of highly illiquid securities (often closed-end funds that do not trade on any exchange) a means of exiting their investments. Tender offers are subject to proration (proportional distribution based on % of ownership) so in the case of oversubscription only some shares from each holder of record are purchased, unless, there is an odd-lots clause.

The Odd-Lots Clause:

The odd-lots clause is an increasingly rare, somewhat archaic, but nonetheless lucrative clause that occasionally shows up on tender offers. It typically states that the first shares to be accepted for tender will be from shareholders who own less than a minimum number of shares (often 100), which is known as an odd-lot.

The reason for the odd-lot clause, and the reason it is considered archaic, is that before the efficiencies of computers a large number of shareholders holding a small number of shares was a hassle to the company. In other words, they could save money on administrative expenses if they were to reduce the number of holders of record; hence, the birth of the odd-lots clause. That clause has stuck around in the boilerplate of many tender documents even if the need for it has not.

A Real Example of Profiting from Odd-Lots:

Example 1: GSOL

A recent odd-lots opportunity was that of Global Sources Ltd. (GSOL), Bermudian B2B media company focusing on the Chinese market. The offer included the following odd-lots clause:

What will happen if more than 5,000,000 Shares are properly tendered and not properly withdrawn? If more than 5,000,000 Shares are properly tendered and not properly withdrawn, we will purchase Shares: first, from all holders of “odd lots” of fewer than 100 Shares who properly tender all of their Shares and do not properly withdraw them before the Expiration Date; and second, from all other shareholders who properly tender Shares, on a pro rata basis.”

(Source SEC, found here: http://www.sec.gov/Archives/edgar/data/1110650/000095016214000015/scheduleto_c.htm)

GSOL filed its tender offer with SEC on March 13, 2014 and made the amendment containing the odd-lots clause on April 30th.  The following is GSOLs price history between March and June when the tender was paid.

GSOL OddLot Tender

Source: Yahoo Finance

The March 13th tender announcement price jump can be seen near the start of this chart as investors reacted to the news of the tender at $10.  The second large price increase was a reaction to additional information provided on April 30th, including the odd-lots clause details. It is worth noting that during the entire time period, between tender announcement and tender completion, the price never came close to the tender price of $10. This spread exists because of proration risk and is where the money is made.

Let’s do some simple math to quantify the opportunity. While some people got in at ~$8 on May 13th let’s use an average price of $8.50, which is roughly what you would have paid had you waited to confirm that an odd-lots clause would, in fact, be included. Either way $2/8 or $1.5/8.5 we are looking at an effectively awesome yield of ~19% over 2.5 months. The ability to recycle the money into a new opportunity means we are looking at well over an annual effective return of around 100% provided the opportunities come up frequently enough.  Taking advantage of odd-lots is not without risk, and these are discussed at the bottom of this article.

Scaling Odd-Lot Tenders:

The primary disadvantage of the odd-lots special situation is an inability to scale.  Making well above normal returns on a tiny portion of your portfolio is hardly going to be impactful at year end.  People have scaled by opening multiple accounts sometimes in the range of 10-40 separate accounts.  I am not familiar with the legalities of this but would be comfortable opening one per family member or one per separately managed account if you are a fund manager.

Finding Odd-Lot Tenders:

Typically the way to find tenders is to search the SEC for an SC-TO form and keep an eye out for an odd-lots clause.

The easiest way is to follow tenders is to follow a few investment bloggers who often do a write up when the offers come up.  Oddball and OTC come to mind, I’ll also be doing some write-ups of my own which you can view at oliverinc.org.

Risks of the Odd-Lot Tender Special Situation:

Similar risks apply to odd-lot tenders as apply to most M&A deals. The primary concern is that the tender falls through, a significant number of things can occur between the announcement date and the closing date which can lead to the tender offer collapsing. Another risk that I haven’t heard of but is certainly a possibility is for the company to drop the odd-lots clause sometime after announcing it. As more people take advantage of odd-lots it defeats the purpose of them from the company’s standpoint and that it’s just not worth it. As always, do your due diligence!

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