On March 13th, Cummins gave you $107.53 of value for every $100 of Cummins stock. If you purchased it at the original publish date of this post, February 26th, it was a 7.53% return in less than a month.
The offer was so popular that they ended up pro-rating everyone to just 6.99% of the shares they offered up for this trade.
It’s known as an odd lot tender offer and one of the only ways a smaller investor has an advantage of institutional investors.
But what is an odd lot tender offer?
A tender offer is a bid to purchase a shareholder’s stock and an odd lot is when you have 1 – 99 shares. A round lot is when your number of shares is evenly divisible by 100 – so 100, 200, 300, etc.
Thus, an odd lot tender offer is when a company offers to buy back its own shares with a separate provision for those with “odd lots,” or less than 100 shares. These can be called odd lot buybacks.
Sometimes, a company doesn’t make a firm offer but instead conducts a Dutch auction to establish a price. A Dutch auction is when the price starts high and is lowered until the number of bids meets the number of shares the company wants to buy back.
Finally, a company only wants to acquire a certain number of shares. If the offer is oversubscribed, which is when the number of shares exceeds what the company wants, they will pro-rate how many shares each shareholder can sell. They often make exceptions to odd lots because they are so small and this is where you come in.
I’ve been reading about odd lot tenders for quite some time, usually because Jonathan at My Money Blog writes about them (the latest involves Cummins and Atmus Filtration), but I’ve never participated.
Today, I just might.
Table of Contents
What was the Cummins & Atmus Filtration Deal?
Cummins (NYSE: CMI) spun off Atmus Filtration (NYSE: ATMU) but still owns 80% of ATMU’s stock.
They’d like to own less, so they’re offering $107.53 of ATMU for every $100 of CMI stock. There’s no Dutch auction on this one, just an offer.
The upper limit is 13.3965 shares of Atmus Common Stock per share of Cummins Common Stock and there is no lower limit (no minimum exchange ratio).
Before the market opened on February 26th, Atmus shares were valued at $22.81 and CMI stock was valued at $263.97. That’s a ratio of 11.57 so we’re still under the upper limit.
- What is the tender offer? Get $107.53 of ATMU for every $100 of CMI
- What is the upper limit ratio? 13.3965 shares of ATMU to CMI
- What is the lower limit ratio? No lower limit.
- When is the expiration date of the offer? March 13, 2024.
What were the final results of the tender?
In the end, Cummins accepted 5.5 million shares of Cummins stock and gave out 67 million shares of Atmus stock. They prorated everyone who had more than 100 shares down to just 6.99% after accepting all the odd lot tenders (fewer than 100 shares). Cummins traded away all of their outstanding shares of Atmus stock, which was their goal.
What Are The Benefits?
The benefits are that you own an odd lot, you accept the tender, and you receive $107.53 of ATMU stock for every $100 of CMI stock. That’s a 7.53% return in less than a month.
If you buy 99 shares of CMI at $263.97, that’s a total value of $26,133.03. You would get ~$28,100.84 of ATMU, for a gain of $1,967.81.
Once you get the ATMU stock, they are yours to do as you wish. You can sell the shares or hold onto them.
Since odd lots max out at 99 shares, this is usually attractive to smaller investors or financial advisors who want to take advantage of this arbitrage opportunity to offset fees.
💵 This was a particularly attractive offer because the share price of CMI is so high. Most stocks don’t trade at such a high price per share. For example, last year, Valvoline extended a tender offer but its share price was around $38. The profit on that deal was only around $150.
What Are The Risks?
Odd lot tenders are not guaranteed profits.
There are quite a few risks.
The biggest risk, though extremely rare, is that the deal is withdrawn or terminated. This rarely happens but is possible. There are several conditions in which the offer could fail to go through. The most likely (and this is extremely unlikely) one is if there are not enough shares being sold back (not enough ATMU stock being sold to CMI). Another one is if they receive “an opinion of counsel that the exchange offer will qualify for tax-free treatment to Cummins and its participating stockholders.” (from their press release)
If this happens, the stock will likely go down. Some of the shareholders were only owning it for the odd lot tender offer, so those investors will sell their shares.
The deal could be extended. The current deadline in March may be extended for whatever reason and this would reduce the total return from the deal since the holding period is increased.
The next major risk is that the respective stock prices move in such a way that you now exceed the upper limit ratio. If you exceed the upper limit ratio, the amount of ATMU stock you get for your CMI stock will go down. Your 7.53% premium gets smaller.
The stock can also go down in price while you await the tender. CMI stock continues to trade and its price will change. If it goes up, fantastic! If it goes down, that eats into your returns.
Finally, the last risk is that the stock prices go down after the sale (and it most likely will go down). All those ATMU shares that were in CMI coffers are now in shareholder hands. Some of those shareholders were only in it for the arbitrage opportunity so they’re selling the moment they get the shares.
The only question is whether this pressure will be greater than the premium and how quickly will you be able to sell the shares.
One risk you won’t face is being prorated. What’s nice about odd lot tenders is that you don’t have to worry about the risk of pro-ration – since odd lots are not subject to pro-ration.
Am I Required to Accept The Tender Offer?
No, it’s voluntary.
In fact, you have to accept the offer to participate.
If you do nothing, you do not participate.
How Do You Accept The Tender Offer?
As a matter of protocol, if you own an odd lot and do not accept the tender, you’ve effectively declined it. It’s a voluntary corporation action. If you miss the notice and don’t respond, you’ve effectively declined it. (corporate actions that are mandatory are mergers, stock splits, spin offs, etc.)
The deadline for the CMI/ATMU offer is March 13th but some brokerages may need you to respond ahead of that date.
Let’s say you own an odd lot of a company that has made an odd lot tender, how do you go about accepting it? This will vary from brokerage to brokerage. Some will have a way to do it online, others will require you to call in.
In Vanguard, there’s Corporate actions menu in your brokerage account view:
This opens a window where you can respond to Voluntary corporate actions:
As of this writing I don’t own any shares of CMI so there are no corporation actions to show.
Once you accept the offer, you’ll likely get the shares of ATMU about 7 business days after the deadline.
Why Do Companies Do This?
There are a lot of reasons. But the core reason is that they want to reduce the number of shareholders, especially the smaller ones.
There are costs associated with having shareholders. You can reduce that cost by reducing the number of shareholders by buying up their shares for a small premium.
Sometimes a company owns a large portion of another company, either by spinoff or some other action, and they want to take advantage of it to improve their share price. In 2023, Johns & Johnson (NYSE: JNJ) spun off its consumer staples unit, Kenvue (NYSE: KVUE), and held 90% of the company. J&J offered to buy back its stock using shares of Kenvue, rather than cash and did so at a 7.5% premium. For every $100 of JNJ it purchased, it would give the shareholder $107.53 in KVUE stock.
Whatever the reason, the beneficiary is you, the smaller investor, because you can (potentially) earn a quick premium.
