An exchange offer is an offer in which people are invited to trade stocks or bonds for other stocks or bonds, rather than for cash. There are a number of settings in which such an offer could be made, and these offers can be used in different ways by financial institutions and people who work in the financial industry. This term is also used to refer to a specific type of tender offer.
In the case of a tender offer, a company or individual is attempting to get a controlling share in a company. Consequently, an open invitation to sell shares in that company is issued. The offer is usually conditional; people are asked to sell their shares for a premium price with the understanding that the price will only be good if at least 51% of the shareholders agree to sell. Sometimes, a tender offer may be made in the form of an exchange offer, in which case shareholders will be invited to trade their shares for shares in another company.
One way in which an exchange offer might be used is if a company is trying to spin off a new division. In this case, people with shares in Xyz Corporation might be asked to consider an exchange offer in which they could trade their Xyz shares for shares in Xyz Services Corporation. This can sometimes be advantageous because it allows people to obtain shares in a new company or division at a favorable price.
Beyond tender offers, exchange offers can be used in other ways. Companies which issue bonds may make an exchange offer which allows people to exchange old bond issues for new ones, usually with something in their favor like better interest. This is sometimes done to extend the maturity date on bonds, to increase available funds, and for other reasons. Companies close to bankruptcy may also sometimes make an exchange offer to buy time.
When someone accepts an exchange offer, there can be tax considerations. An accountant should be consulted to determine what kind of tax liability is involved. Exchanging one set of shares for a higher value set of shares, for example, could be considered income. It is important to make sure that all trades and sales are recorded appropriately on tax documentation to avoid problems with tax agencies and it can be helpful to hire an accountant to make sure that everything is properly accounted for.