What is an open offer and why do companies do them?

Companies will often decide they want, or need, to raise money. This can be done in numerous ways, including borrowing money or selling new shares.

An ‘open offer’ is one avenue for the latter.

What is an open offer?

An open offer gives existing shareholders the right to buy new shares in a company, at a lower price (discount) to the current market price. You might also hear an open offer referred to as an entitlement issue.

For example if you owned 500 shares in a company, and an open offer is announced giving you the right to buy one share for every five you own, you could buy up to 100 new shares in total. The level of the discount in price applied to these new shares varies from case-to-case, with the details released by the company before the new shares become available.

This initial offer is known as a ‘basic entitlement’ and is guaranteed. It can’t be reshaped or resized.

There’s also something called an ‘Excess Application Facility’. This offers the opportunity to buy extra discounted shares. This is a different pot of shares to the basic entitlement, and unlike the guaranteed pool of shares, the excess facility can be scaled back and isn’t guaranteed.

The money raised could be used to buy a rival company, invest in growth or pay down debt if things have reached difficult levels.

How are open offers different to rights issues?

Truth be told, open offers and rights issues are very similar. However, one key difference is that with an open offer, you can’t sell your rights in the market.

Should you choose to do nothing with the open offer (i.e. decide not to buy any discounted shares) you won’t receive a lapsed cash payment either, like you would for a rights issue.

Apart from this, the process for open offers and what it means for investors is very similar to a rights issue. You can find out more by reading our article on rights issues.

Learn more about rights issues

Other important bits

Buying shares through an open offer won’t increase your share of the company (unless you take up more than your basic entitlement). This is because the number of new shares offered to shareholders are in proportion to what they currently own.

That also means if you choose not to subscribe to the new shares being offered, your overall holding in the company will be diluted.

Should I take up open offers?

Choosing whether or not to take up the offer of new shares should be decided on a case-by-case basis. There are a few important questions to ask before deciding:

• Why is the company raising money? Is it because it has a good growth opportunity or is it doing it under duress?
• Is the discount overly steep? This can suggest a company is desperate for funds, which can indicate stress
• Is there a track record of asking investors for money? If a company has repeatedly gone cap-in-hand to investors, it can be a bad sign
• If you’re choosing not to take up the new shares – why? If everything looks in order and you aren’t prepared to buy more shares at a discount, it could mean you’ve lost faith in the long-term investment case for the company altogether

This article is not personal advice. As always, if you’re not sure about an investment decision you should seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

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About our author

Sophie Lund-Yates



Sophie is our Lead Equity Analyst on the share research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie holds the Investment Management Certificate, and has also passed the Securities component of the CISI Investment Advice Diploma. She's currently working towards the CFA's Certificate in ESG Investing.

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