Beware: Odd Lot Tender Offers

Stocks are sold in lots of 100 shares. Buying (or owning) less than one hundred shares is possible. When this occurs, the owner is said to have an ‘odd lot’ of shares.

I often have odd lots of shares. When I invest in a stock, I do so by the amount I have available to invest – which may or may not be enough to buy a hundred shares of the stock.

If you are in my situation, there will be times when you receive an odd lot tender offer.

What is an odd lot tender offer?

Typically an odd lot tender offer is an offer by the company issuing the shares, to buy back shares from owners with less than 100 total shares in an account.

The Securities and Exchange Commission allows targeting of shareholders with less than 100 shares for these offers.

Once the company decides to offer an odd lot tender, a letter is typically sent (by the brokerage firm holding the account with the company shares) to the shareowner, specifying the offer.

I recently received one from a well known aerospace company. It contained an offer either to buy back my 58 shares or to let me buy additional shares to make a whole lot.

Why does a company offer odd lot tenders?

Odd lots are expensive for the issuing company. Record keeping and complying with government regulations is expensive. Annual reports and quarterly updates must be distributed to the shareowners, account information must be tracked, proxy votes collected and etc. If there are a lot of shareowners with fewer than 100 shares in their account, the company is spending more money than they wish on record keeping.

In other words, the company is trying to get rid of you, the small shareowner.

Should you respond to the odd lot tender offer?

It depends.

If you acquired your shares via merger or spinoff or some other indirect method, you may not have consciously decided to own them. Maybe you really don’t want them, but haven’t wanted to pay the broker fees to sell them. Often odd lot tender offers allow you to sell at reduced rates.

If the offer from the company is a good deal for you and you don’t care to hold the shares you might want to take advantage of it. Sometimes the company will buy the shares back at a premium, giving you more than market value. This, coupled with the removal of a broker commission might be a good deal for you.

Perhaps you are not already a shareowner of the company and you hear about an odd lot tender offer taking place. If the offered price is above what you think market price will be, you might be able to make a quick short term profit – by purchasing at market and then selling back through the tender offer.

This is a risky proposition however, as the market price could rise above the offering price and then you would either be stuck with a loss or the stock. You also have to consider any fees associated with either the purchase of the sale. An author at Experiments in Finance describes his second try at odd lot tender offers.

If the company is just trying to reduce expenses, at your expense, you probably don’t want to take action on the offer. You don’t typically have to respond to the offer and usually can just keep your shares as an odd lot.

The offer I just got was a pretty terrible deal for the shareowner. The company was not offering a premium price for the shares (instead they offered a weighted weekly average) and were charging $3.50 a share to do the buy back. In addition, they offered the shareowner the ‘opportunity’ to bring their sharelot up to 100 shares by allowing them to buy shares at the weighted average, plus a $3.50 per share fee and a purchase deposit of $82 a share. What a deal! I would get to pay $85.50 per share PLUS the cost of the shares. Hmmmmm. No thanks.

Is the company odd lot tender offer final and firm as of the offering.

Maybe, maybe not.

Last year, a veterinary firm (Heska)  offered $8.50 per share for their odd lot buy back and later increased it to $9.50 per share.

Sometimes too many shareowners want to sell, exceeding the cash available at the company for the event, and some of them do not get to sell.

Have you participated in an odd lot tender offer? What was your experience?

This post has been written by Marie from FamilyMoneyValues.com. Be sure to visit her site if you’ve enjoyed this post.