Welcome

Welcome to OddLotArbitrage.com, your go-to source for information on arbitrage opportunities in odd lot tender offers. We provide notifications about arbitrageable corporate actions that the small investor can take advantage of to produce outsized risk adjusted profits with no paid subscription required.

Please feel free to contact us at admin@oddlotarbitrage.com with any feedback, suggestions or questions.

What are Tender Offers & Odd Lot Provisions

A tender offer is a corporate action in which a company offers to purchase stock from its shareholders. Typically, this will be at a price within a stated range that is above the market price at the time of announcement to encourage participation, lending support to the stock price which will often rise on the announcement.

As the offered price is usually above the market price and the company will be offering to purchase a limited number of shares, it is usual for more shares to be offered for tender than the company wishes to buy. In this case, eligible shareholders will be prorated, and only a fraction of their offered holdings will be taken at the offered price.

The stock price post tender announcement will reflect the market’s expectation of this haircut. For example, a stock trading at $50 pre announcement of a tender offer at $65 may trade at $55 post announcement, reflecting the expectation that a 1/3 of offered stock will be purchase by the company post pro rata. All else being equal, the remaining 2/3 could be expected to fall back post expiry, creating a situation where no arbitrage is possible (practically this is similar to merger arbitrage, it is possible to profit but the market will be trying to price this in).

Odd lot tender offers provide an exception to this rule; they state that shareholders holding “odd lots” of 99 shares or less will not be prorated. This preferential treatment is granted as having small investors on the register incurs outsized costs on the company, which is therefore incentivised to buy them out fully.

In our example above, an odd lot tender offer provision would allow an investor to buy 99 shares at the post announcement price of $55, for a total of $5,445, and sell them all to the company at $65, for a total of $6,435, making a $990 profit. This is an 18% return on capital employed over the time between the announcement and completion of the offer, (typically approximately one month) with minimal exposure to market price risk as the offer price has been set on announcement. Purchasing closer to the expiry date improves capital efficiency further by reducing the amount of time cash needs to be tied up for.

The Opportunity

Simply stated the arbitrage opportunity presented by odd lot tender offers is to buy 99 shares of the company between the offer announcement and completion date and sell them to the company for an arbitrage profit. Due to the 99 share limit, this opportunity is too insignificant to exploit for institutional investors and is one of the few cases in which a retail investor has an “edge”.

The maximum position size possible scales linearly with stock price, making offers from companies with higher stock prices generally more profitable; for example, when White Mountains Insurance Group (WTM) announced a tender offer at $825 – $875 per share it closed the day trading at $858, for a maximum potential profit of $1,695. At the extremes this Norilsk Nickel offer resulted in possible arbitrage profits of around $10,000 for odd lot holders.

Risks & Risk Management

While the textbook description of “arbitrage” suggests a risk free profit, in the real world these opportunities come with some risk. In the case of odd lot tender offers, these risks come in two main forms:

First, while highly unusual, the company could withdraw the tender offer completely. Often this will cause the stock price to drop as the support from the offer is withdrawn, causing a loss on your holdings.

Second, if the offer takes the form of a Dutch auction (offer in a range, e.g. $35 – $37), too many people tendering their shares may result in the tender clearing at a price lower than that you are willing to sell at. Again, once the offer expires the price of any stock you are holding could fall below your purchase price.

An investor can protect against these risks by hedging, but this will require the use of derivatives that are not available to all investors.

Execution

The first step in participating in an odd lot tender offer is hearing about it. This can entail a significant investment of time as the announcements are buried within hundreds of pages of SEC filings – fortunately, we announce and link to these filings here. Be sure to follow us for updates about new offers!

The next steps are straightforward; buy 99 shares and call your broker to let them know you want to tender them and at what price if there is a range. Check in advance what fees your broker charges for commissions and tendering as they can significantly alter the profitability of the trade. Hedge the position if you intend to do so.

This can be repeated in as many accounts as you have access to; if, for example, you can arrange with family members to repeat the transaction on either their or your behalf on their accounts, you can exploit a single opportunity multiple times, which can quickly add up.

Disclaimer

The information provided here is for educational purposes only. It is not a solicitation to trade or financial advice. Investors must consider their own financial situation and conduct their own due diligence before deciding whether a trade or investment is appropriate for them. If in doubt, consult a financial advisor with knowledge of your personal circumstances.