Psst! Don't Fall for This Bad Stock Buyout Scheme

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Psst! Want to make a quick buck from your stock portfolio? Well, there's a small company that'll pay cash for shares you own if you're one of the lucky few who can get in on its offer. Move fast, though, because this hot deal might not last.

Does that sound like the language of a hustle? Well, according to many finance professionals and experts, it is.

Over the past few years a host of "mini-tender" offers have landed on the market. Although they are technically legal, they prey on ignorant investors to make a quick buck. Here's the skinny on them.

Legal Tender

A standard tender offer is a straightforward (and fairly common) financial instrument.

An entity aiming to acquire a percentage of control of a publicly traded company makes a formal bid to solicit shares from existing shareholders, filed with the Securities and Exchange Commission, with the terms of the offer clearly enumerated. Among other investor protections, once the offer is made, those who have accepted it may withdraw if a more favorable bid is made by another party.

Stock tenders almost always offer a premium to the current share price; after all, the bidder has to entice people to sell their stock.

In contrast, the intention of a mini-tender offer is not to gain a controlling position in a company. There's a solid (and very shady) reason for this -- bids for less than 5 percent of the outstanding shares of a company do not have to comply with the SEC's rules for standard tender offers.

In this case, investor protections are basically nonexistent. As if that weren't scary enough, the entity making the offer is also not required to file paperwork with the SEC. It doesn't even have to notify the target company.

Essentially, mini-tender offers are sneaky attempts at grabbing fistfuls of shares cheaply. Almost always, the offer is for notably less than the current stock price -- all the better for the offering party to turn around and sell the tendered stock for an instant profit on the open market.

In the Dark

This, of course, raises a question: Why the heck would anyone want to sell their shares for less than they're worth?

Well, there is a lot of blind money in the market. For various reasons, some investors know dangerously little about the value of the stock they own, or even how share trading works. These unsuspecting souls are choice targets for the mini-tender guys.

The way it works is generally this: An offer is announced, and it makes the rounds via an impressive-looking and formally worded document detailing the offer price and the stipulations. It's usually fairly long, likely to reduce the chance of the reader digging too deeply into the latter section -- home of the typically very restrictive conditions of the sale.

There is usually little to no commitment from the offering party. It's often allowed to withdraw at any time without penalty, or extend the term of the bid to its advantage (if market price of the shares dips below the offer price, the bidder can then extend until the stocks rise back to or above said offer price).

Big Targets

Mini-tenders usually target large, well-known companies that have many shares outstanding and a very wide investor base -- more stockholders, after all, means more potential suckers.

Numerous top stock-exchange names have been the target of mini-tenders. One of the latest is McDonald's (MCD). This past January, TRC Capital, an obscure Canadian firm responsible for a great many mini-tenders, offered to purchase up to 1.5 million shares (less than 0.2 percent of the outstanding amount) of the fast-food giant. The bid price was $86.80 per share -- more than 4 percent below the market price.

Late last year, TRC Capital made a solicitation for Target (TGT) shares, offering $59 apiece for up to 2 million shares (0.32 percent of outstanding shares). As with the McDonald's play, that price was 4.5 percent lower than market.

Know the Intel

Mini-tenders are basically a no-lose proposition for those launching them and a guaranteed way for accepting shareholders to get shortchanged.

Want to see a specimen of a mini-tender? The Financial Times has uploaded here a 2013 offer made by TRC Capital for shares of Intel (INTC). Lowball offer price? Check. Option for the offering party to extend? Affirmative. Total shares solicited under 5 percent of the outstanding amount? Yep. Many red flags are flying high on this one.

The mini-tender is a lazy, get-rich-quick scheme that relies on ignorance. We should all be aware of this unscrupulous practice, and be sure not to let its purveyors take our money.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Intel and McDonald's. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.
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