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Written by and copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved.
Should you sell when the company offers to buy back your shares at a price that is above where it is trading now? If so, what should you bid? If you do not own
the stock, can you trade this pattern? This page answers those questions but click here for more information about Dutch auction research.
Discovered by Thomas N. Bulkowski in September 2006.
Important Bull Market Results for Dutch Auction Tender Offers
Overall rank for up/down breakouts: 2 out of 7; 3 out of 6
Break even failure rate for up/down breakouts: 16%; 28%
Average rise/decline: 35%; 12%
Throwback/pullback rate: 63%; 52%
Percentage meeting price target for up/down breakouts: 63%; 48%
Dutch Auction Tender Offer Definition
Pattern period: The event pattern begins the day of the announcement, or if the market was closed during the announcement, use the next day. It ends on the day the auction ends.
Dutch Auction Tender Offer Identification Guidelines
| Characteristic | Discussion |
| Auction | The company announces a “modified Dutch auction tender offer” for shares in the company. |
| Range | The offer to buy the shares comes in a price range, like $22 to $23.50. |
| Shares | The company will tell you how many shares they intend to buy, such as 10,000,000. |
| Premium | The company offers a premium (higher price) to the existing share price 62% of the time. |
| Outstanding | The median buyback rate is for 17.1% of the shares outstanding. |
| Breakout | 58% of the time the breakout direction is downward (price closes below the low posted during the pattern period). |
| Volume shape | The predominant volume shape is U, regardless of the breakout direction. That
means volume is high on the announcement and expiration dates and recedes between those two events. |
Tendering Shares
| Characteristic | Discussion |
| Large buyback | Stocks with buybacks above the median 17.1% of shares outstanding tend to perform worse post breakout than do those with small buybacks. Accept the tender
offer. |
| Small buyback | Small buybacks (below the 17.1% median of shares outstanding, tend to perform well post breakout. However, a month after the breakout, only 29% of the
stocks I looked at were above the tender price. Even after 3 months, just 47% had moved above the tender price. |
| Offer expiration | In 65% of the cases, price closes below the accepted tender price on the day the offer expires. |
| Price | 96% of the time, price will drop below the accepted tender price sometime in the next 3 months, declining a median 10%. |
Offer Price
At what price should you
offer your shares? Compute the difference from the offer high and low prices to get the price range. For example, if the offering
range is 22 to 24, that is a $2 range. If you decide to sell your shares at 10% of this range below the offering high, that
is, 24 – (10% * $2) or 23.80, that offer would be accepted 54% of the time. The following table shows additional ranges
and how often it succeeds.
The 25% rate succeeds 70%
of the time, so that will work in 2 out of 3 trades and that is the percentage I recommend. In the 22 to 24 range, for example,
that means you would tender shares at $23.50.
| Percentage below High | Success Rate |
| 20% | 62% |
| 25% | 70% |
| 40% | 74% |
| 50% | 80% |
| 75% | 90% |
Dutch Auction Tender Offer Trading Tips
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The fewer people or institutions tendering their shares, the higher the buyback
price is likely to be. Thus, if you want to trade this event pattern, look for
buybacks that cover multiple classes of shares and choose the one in which you
think fewer shareholders will tender their shares. If the public trades the class B
shares, then buy class A and tender it. If class A is thinly traded, that is good
because the arbitrage funds typically active in Dutch auctions will have a harder
time buying the shares. They are more likely to trade the class B shares.
Read the offering. If insiders are not tendering their shares, that is good. Look for the percentage of institutions
owning shares. A small percentage of institutional ownership means a fragmented base, and one in which any single
shareholder is unlikely to dominate and tender their shares, pushing down the tender price.
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If the offering is for a substantial number of shares outstanding, that is good. It means a higher price when fewer
than the maximum shares are tendered.
| Trading Tactic | Explanation |
| Measure rule | See the figure to the right. Compute the height from the highest peak (A) to the lowest valley
(B) during the tender offer period then multiply it by the above “percentage meeting price target.” Add (upward breakouts) or
subtract (downward breakouts) the difference to the breakout price (the highest peak [upward breakouts] or lowest valley [downward breakouts]) to get a price target (C). |
| Breakout | See the figure to the right. Wait for the breakout before taking a position. A breakout occurs when price closes above the highest peak (A)
or below the lowest valley (B) in the pattern period. |
| Downward breakouts | If the breakout is downward, look for a V-shaped recovery. This event pattern ranks second for the change after the trend ends. That means,
after a downward breakout, price rises an average of 52% once it bounces off the bottom. If you can buy in close to the bottom, you can do well with this pattern. |
| Trendline | If the breakout is downward, draw a trendline downward following the price action. When price closes above the trendline, it may mean the trend has changed.
Be wary of this method if it occurs soon after (within 2 weeks or so) the breakout – it may be a pullback (the average
time to complete a pullback is 10 days). Once you get a trendline signal, use other technical tools to confirm the trend change. |
| Upward breakouts | If the breakout is upward and the trend leading to the start of the pattern is short-term (less than 3 months), then that suggests a more powerful up
move (an average gain of 42%. Intermediate-term (31% avg rise follows a move of 3-6 months duration) and long-term (23% rise
after a trend of over 6 months) follow, but samples are few. The trend leading to the event pattern is likely to be up (86% trend up, regardless of the breakout direction). |
| Height | Short patterns, below the median 8.13% height divided by the breakout price, rise (upward breakouts) an average of 47% post breakout. That means look
for a horizontal, tight congestion region. |
| Busted patterns | If price breaks out in one direction then reverses and breaks out in the new direction, either exit an existing position and reverse, or
trade in the new direction. This is a busted pattern and it usually signals a strong trend. The shorter the move in the original breakout direction, the better,
that is, busted patterns usually move less than 10% away from the breakout before reversing. |
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 The Measure Rule
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Dutch Auction Tender Offer Example
The above red box shows the tender offer period for the drug stock. After the tender
offer expired, the stock made a V-shaped drop before nearly doubling. When price climbed above
the breakout price, highlighted here by a horizontal blue line and the letter A, an upward
breakout occurred.
-- Thomas Bulkowski
Copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved. Why do birds fly south for the winter? Because it's too far to walk.
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