Fixed-Price

A fixed-price deal is exactly what it sounds like: a transaction where the price of a security is set in stone and doesn't budge, no matter what the rest of the market does. Think of it as the opposite of buying a stock on the open market, where the price ticks up and down every second. This pre-agreed price provides certainty for both the buyer and the seller. You’ll most commonly encounter fixed-price arrangements in specific corporate actions like an Initial Public Offering (IPO), where a company sells its shares to the public for the first time at a set price. They are also the bedrock of many merger and acquisition (M&A) deals, especially cash takeovers, where an acquirer offers a specific dollar amount per share to buy another company. Similarly, a tender offer, where an investor offers to buy a large number of shares directly from shareholders, is typically made at a fixed price. This method removes the volatility of market-based pricing from the equation, making the total value of the deal predictable from the outset.

A fixed price simplifies complex transactions by putting a clear, unchanging number on the table. How it’s applied, however, varies by situation.

When a private company decides to go public, it works with an investment bank, known as an underwriter, to determine the IPO price. Through a process called 'book building', the underwriter gauges interest from large institutional investors to find a price that is attractive enough to sell all the shares but high enough to raise the maximum capital for the company. This final price is the fixed price at which shares are first sold to the public. This traditional method provides price certainty but stands in contrast to other methods like a Dutch Auction, where the price is determined by the bids of the investors themselves.

In an M&A deal, an acquiring company might make a cash offer to buy a target company for, say, $50 per share. This is a fixed-price offer. For the shareholders of the target company, it's a straightforward proposition: you get exactly $50 in cash for each of your shares when the deal closes. This clarity is appealing, but it also creates an interesting dynamic. If the deal takes months to finalize, the target company's stock might trade on the open market at a price slightly below the offer price (e.g., $49.50), reflecting the risk that the deal might fall through. This small gap can create opportunities for arbitrage traders.

For a value investor, a fixed price is neither inherently good nor bad. It's simply a piece of information—a very clear one—that must be measured against your own analysis.

The primary benefit of a fixed price is that it eliminates guesswork. If you have done your homework and calculated a company's intrinsic value to be $100 per share, and another company launches a tender offer at a fixed price of $80, the decision becomes much simpler. You have a clear, actionable opportunity without worrying about the price getting away from you due to market mood swings. The price is locked in, allowing you to focus purely on its relationship to value.

Certainty can be a double-edged sword. A fixed price can lock you into a bad deal just as easily as a good one.

• Capped Upside and Opportunity Cost: Imagine you own shares in a company that receives a fixed-price takeover offer. If you believe the company is worth much more or that a better offer might come along, the fixed price acts as a ceiling on your potential profit. Accepting it could mean a significant opportunity cost if the company's prospects—or a rival's bid—prove to be much better.
• The IPO Hype Machine: The fixed price of an IPO is often the result of intense marketing and excitement, not a sober analysis of the business's long-term earning power. Value investors should be extremely cautious. A price that is “fixed” is not necessarily “fair.” More often than not, it's a fixedly high price designed to capitalize on public enthusiasm.

A fixed-price offer provides wonderful clarity in an often-chaotic market. It establishes a clear hurdle: is this price attractive relative to the underlying value of the asset? However, it does not change the fundamental task of the investor. Never let the certainty of a fixed price distract you from the hard work of calculating what a business is actually worth. The price is just a number; for a value investor, the value is what truly matters.