Fixed-Price tender offer vs Dutch Auction vs Open Market - CFA mock question

Hello All,

Long time lurker here. I can’t seem to figure out the question from the CFA AM mock regarding fixed-price vs dutch auction vs open market

Comapny wants to buy 5 million shares, current price = 49.50. Which repuchase method will most likely result in average share price being 49.80 (Fixed Price, Dutch Auction, Open Market).

Price - Shares Available

  • 50 - 9 million
  • 49.90 - 5 million
  • 49.80 - 3 million
  • 49.70 - 1 million
  • 49.60 - .5 million
  • 49.50 - .5 million

So the answer is dutch actuion. However, they say Fixed-price won’t be available to buy the nessecary volume. I don’t understand why that is the case. 3 million + 1 Million + .5 Million + .5 Million if they tendered an offer at 49.80.

Thank you for any help.

Total stab in the dark but I’m thinking this:

As it’s the company who’s buying the shares and it’s the investors who are tendering them, then the company starts off as low as possible (at the end of the price range where investors least want to sell) and then gradually increases it’s purchase price which brings more investors in who are willing to sell.

Hence it would buy up all the shares available at 49.50 up to 49.80 and as 49.80 has the most shares available, then that becomes the average price (well roughly).

But as I said, that was a total guess.

Wikipedia seems to share this view:

Dutch auction share repurchases[edit]

The introduction of the Dutch auction share repurchase in 1981 allows firms an alternative to the fixed price tender offer when executing a tender offer share repurchase. The first firm to utilize the Dutch auction was Todd Shipyards. A Dutch auction offer specifies a price range within which the shares will ultimately be purchased. Shareholders are invited to tender their stock, if they desire, at any price within the stated range. The firm then compiles these responses, creating a supply curve for the stock.[2] The purchase price is the lowest price that allows the firm to buy the number of shares sought in the offer, and the firm pays that price to all investors who tendered at or below that price. If the number of shares tendered exceeds the number sought, then the company purchases less than all shares tendered at or below the purchase price on a pro rata basis to all who tendered at or below the purchase price. If too few shares are tendered, then the firm either cancels the offer (provided it had been made conditional on a minimum acceptance), or it buys back all tendered shares at the maximum price.

I’d be curious to know the logic behind this answer as well. Why have I always thought that Tender offer and Dutch Auction are same thing?

Open Market - This option can be eliminated because at 49.50 only 0.5 million shares are available for sale.

Dutch Auction - 5 million shares @ 49.80 (0.5+0.5+1+3)

Fixed Price - At 49.80, stand alone interest is only 3 million shares

Hence, Dutch Auction is the answer.

A tender offer is simply an attempt to take over a company, by purchasing shares from current shareholders. It can happen through an open market operation (use of brokers), dutch auction (descending process, where you pay the price allowing you to buy the desired amount of shares) or fixed price (average or current market price + premium) where you specify the number of shares you desire.

I was opting for tender offer as well - what stops a company to offer 49.80 USD for 5 mln shares to all who care to sell at that price?

Or is a tender offer a one-by-one approach to every single investor to negociate an individual price?

In reality (I guess) you go only for the fat cats that hold large blocks of shares when using a tender offer?

Perhaps the issue is that while there are 5 million shares at the desired price and below, a tender off at $49.80 reveals the company’s intention, therefore allowing investors to bid the price of the stock up. A similar situation is likely if investors became aware that the company in purchasing shares in the open market.

By doing a Dutch Auction, investors offer the lowest bids they are willing to accept. In this case, it would fall in line with the values listed above since 5 million shares would be bid at or below the target price. Then, the company would but the 5 million shares at the price that satisfies enough investors, $49.80.

A tender offer is definitely not a one-by-one approach. It’s a process where a company would offer a premium to investors to purchase shares. The premium should be high enough to entice the number of shares the company desires to be purchase.

Any investor can tender shares. Tender offers are generally open offers to all investors of a company.