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+Chapter 27: Arbitrage 
+TENDER OFFERS 
+451 
+Another type of corporate takeover that falls under the broad category of risk arbi­
+trage is the tender offer. In a tender offer, the acquiring company normally offers to 
+exchange cash for shares of the company to be acquired. Sometimes the off er is for 
+all of the shares of the company being acquired; sometimes it is for a fractional por­
+tion of shares. In the latter case, it is important to know what is intended to be done 
+with the remaining shares. These might be exchanged for shares of the acquiring 
+company, or they might be exchanged for other securities (bonds, most likely), or 
+perhaps there is no plan for exchanging them at all. In some cases, a company ten­
+ders for part of its own stock, so that it is in effect both the acquirer and the acquiree. 
+Thus, tender offers can be complicated to arbitrage properly. The use of options can 
+lessen the risks. 
+In the case in which the acquiring company is making a cash tender for all the 
+shares (called an "any and all" offer), the main use of options is the purchase of puts 
+as protection. One would buy puts on the company being acquired at the same time 
+that he bought shares of that company. If the deal fell apart for some reason, the puts 
+could prevent a disastrous loss as the acquiring stock dropped. The arbitrageur must 
+be judicious in buying these puts. If they are too expensive or too far out-of-the­
+money, or if the acquiring company might not really drop very far if the deal falls 
+apart, then the purchase of puts is a waste. However, if there is substantial downside 
+risk, the put purchase may be useful. 
+Selling options in an "any and all" deal often seems like easy money, but there 
+may be risks. If the deal is completed, the company being acquired will disappear and 
+its options would be delisted. Therefore, it may often seem reasonable to sell out-of­
+the-money puts on the acquiring company. If the deal is completed, these expire 
+worthless at the closing of the merger. However, if the deal falls through, these puts 
+will soar in price and cause a large loss. On the other hand, it may also seem like easy 
+money to sell naked calls with a striking price higher than the price being offered for 
+the stock. Again, if the deal goes through, these will be delisted and expire worthless. 
+The risk in this situation is that another company bids a higher price for the compa­
+ny on which the calls were written. If this happens, there might suddenly be a large 
+upward jump in price, and the written calls could suffer a large loss. 
+Options can play a more meaningful role in the tender off er that is for only part 
+of the stock, especially when it is expected that the remaining stock might fall sub­
+stantially in price after the partial tender offer is completed. An example of a partial 
+tender offer might help to establish the scenario. 
+Example: XYZ proposes to buy back part of its own stock It has offered to pay $70 
+per share for half the company. There are no plans to do anything further. Based on