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