Definition
An exchange offer is a tender offer where the consideration paid to tendering shareholders is securities (usually the bidder’s stock) rather than cash. The bidder offers, for example, “1 share of bidder common stock per 2 shares of target” (a fixed exchange ratio) or some equivalent.
Why it matters
Stock-for-stock exchange offers let a bidder pursue a target without raising cash. They also let target shareholders defer tax (via §368 reorganization treatment when structured properly) and continue holding equity in the combined entity.
Mechanics
- Often combined with a back-end merger to mop up untendered shares
- Subject to additional registration requirements under the Securities Act if the bidder securities are not already registered
- May include a collar that adjusts the exchange ratio if the bidder’s stock price moves outside a range before closing
Distinction
A cash tender offer pays cash. A mixed consideration offer pays a blend of cash and securities.