Definition
A company or outside bidder offers to buy shares from existing shareholders at a specified price (often at a premium) for a specified period. Shareholders may choose to tender (sell) or keep their shares.
Example
A company offers to buy back 1,000,000 shares at $12/share when the current price is $10. If you hold 500 shares and tender them, you would receive 500 × $12 = $6,000. If the offer is oversubscribed and only 50% are accepted, you would sell 250 shares for $3,000 and keep the remaining 250.
Interview Q / Model Answer
Q: Why would a company use a tender offer instead of buying in the open market?
A: Tender offers allow a quick repurchase of a large block of shares at a set premium, providing certainty and incentive, which is different from gradual open-market purchases.
Definition
A company offers existing shareholders the right to buy additional shares (usually at a discount) in proportion to their current holdings. Shareholders can choose to exercise their rights, sell them, or let them lapse.
Example
A 1-for-5 rights issue is offered at $8/share when the current price is $10. If you own 500 shares, you get 100 rights. You can pay 100 × $8 = $800 to get 100 new shares. The theoretical ex-rights price (TERP) would be approximately $9.67.
Interview Q / Model Answer
Q: What happens if a shareholder does not exercise their rights?
A: Their percentage ownership in the company gets diluted because other shareholders are subscribing to new, discounted shares, increasing the total number of shares outstanding.
Definition
A company repurchases its own shares from the market. This reduces the number of outstanding shares, which can increase Earnings Per Share (EPS) and support the share price.
Example
A company with 10 million shares outstanding buys back 1 million shares. If its net income is $30 million, the old EPS was $3.00 ($30M / 10M). The new EPS is $3.33 ($30M / 9M).
Interview Q / Model Answer
Q: Why do companies do buybacks instead of dividends?
A: Buybacks offer more flexibility, can boost EPS, and allow shareholders to decide if they want cash (by selling their shares). Dividends are typically seen as an ongoing commitment.
Definition
A company offers new shares to a selected group of investors (not necessarily existing shareholders), often through a private placement at a negotiated price.
Effect
This raises fresh capital for the company but can dilute the ownership of existing shareholders who are not part of the subscription offer.
Interview Q / Model Answer
Q: How does subscription differ from a rights issue?
A: A rights issue is offered pro-rata to all existing shareholders to protect them from dilution. A subscription is offered to a select group, meaning other existing shareholders are likely to be diluted.
Definition
Creditors agree to exchange the debt owed to them by a company for new equity (shares) in that company. This is a common strategy during financial restructuring to reduce a company's debt burden.
Effect
The company's debt is reduced, and its equity base increases. However, the ownership of existing shareholders is diluted as the former creditors become new shareholders.
Interview Q / Model Answer
Q: Why would creditors accept shares instead of cash?
A: If the company is in distress and cannot repay its debt in cash, creditors might prefer to take an equity stake to avoid a complete loss in bankruptcy, hoping to recover their value if the company's fortunes turn around.
Definition
A special type of tender offer where a company specifies a price range to buy back its shares. Shareholders then bid, stating how many shares they are willing to sell and at what price within that range. The company then determines the single lowest price (the "clearing price") at which it can buy back its desired number of shares.
Effect
This method allows the market to effectively set the price for the buyback. All shareholders who tendered at or below the clearing price and are accepted will receive that same clearing price.
Interview Q / Model Answer
Q: Why use a Dutch auction tender offer?
A: It is an efficient way to find a fair price based on actual shareholder interest and can prevent the company from overpaying compared to a fixed-price tender offer.
Definition
A plan that allows shareholders to automatically reinvest their cash dividends into buying additional shares or fractional shares of the company, often at a small discount and without paying brokerage fees.
Effect
It allows shareholders to increase their stake in the company over time and benefit from compounding. If the company issues new shares for the plan, it helps conserve cash.
Interview Q / Model Answer
Q: Why would an investor enroll in a DRIP?
A: It's a powerful tool for long-term wealth building. It automates the investment process, allows for compounding returns, and typically saves on trading costs.