Whenever a government company or a big financial institution starts a new project or puts the company up for takeover, they send out invitations to potential bidders. These invitations for bids are known as Tenders. The companies sending tenders typically specify a deadline under which a bid has to be submitted. Tenders can also be referred to as bidding for a takeover by submitting securities like shares and bonds.
What is tender?
A tender represents an offer issued to invite a party to perform work or supply with permission from the parties involved. The tender is prepared by the developer or Contracting Authority while the recipient is a contractor or supplier in a tender procedure.
Release a tender meaning procedure where governments or public institutions invite bids for projects that must be submitted within a finite deadline. Tender filling means a procedure where recipients provide answers and describe materials, mode of operation, prices that can offer in a tender.
Tender acceptance means a letter or memorandum where bidders accept tender procedure conditions. Usually, tender acceptance has a statement like this:
We hereby unconditionally accept the tender conditions of above mentioned tender document(s) / corrigendum(s) in its totality / entirety.
Companies planning to launch big projects give fair chances to multiple vendors to bid for the projects. Most companies or institutions follow a comprehensive process for selecting a vendor. After the tender submission deadline is reached, companies thoroughly examine all the bids that are the best for the project. To make sure that the selection of vendors is fair, they govern every step in the evaluation of the bids.
In the case of takeover bids or tender offers, the companies clearly outline all the conditions for the bids. These conditions may include the takeover price, the number of shares required, and the deadline to submit the bid.
Apart from takeovers and projects, tenders are also invited to supply certain products, raw materials, or services. Such invitations are known as RFT, Request for Tenders. All the invited suppliers are required to submit bids before the deadline. Such tenders are usually governed by the law to ensure a fair bidding process and competition. The private sector uses a different term for tender invitations: RFP (Request for Proposals).
Biddings may include illegal activities like nepotism and bribery to get the tender. To prevent such actions, laws govern every process from bidding to the selection of tender. This has given every private or public vendor a fair chance to curate a competitive bid and submit it before the deadline.
Bidders can use the tender services, which can help them create a competitive bid, make sure that everything complies with the law, and the whole process until the deadline is met.
What is a single tender?
Single tender represents an invitation to tender sent to a single party or invitation to more than one tenderer. Usually, aftermarket research, the developer will contact a few companies and then evaluate all tenders according to the “best value for money” award criterion by establishing the best price-quality ratio and weighing technical quality against the price on an 80/20 basis.
What is pre-tender planning in construction?
Pre-tender planning in construction represents preparation procedures for the tender, such as:
- Identification of needs in construction project
- Planning the activities in the project
- Define the budget
- Procedure type decision
- Project preparation with the definition of the requirements.
Competitive and Non-Competitive Tenders
Competitive and Non-Competitive are two types of tenders generally used by the government to raise funds for government operations. The U.S government sells government treasury notes, bills, and bonds through these tenders. Generally, buyers of these securities are brokers, investors, corporations and commercial banks, pension funds, and dealers. These buyers get maturity benefits and interests on buying these government securities.
Let’s find out what the difference is between Competitive and Non-Competitive Tender.
Competitive Tender – As the name suggests, a competitive tender is a process where bidders have to compete against each other to get the tender. In this case, government securities that are freshly issued are put up for bidding. Many institutional investors submit the bid, and the investor with the highest bids purchases the government securities. The purchase price is the price that the winning investor bid for. Usually, the investors in the competitive tender are large institutions because the bidding price can go relatively high.
Non-Competitive Tender – When the selling price for the security is set by the government and is not bid by the investors, it is known as a non-competitive tender. Here, the non-institutional investors purchase the government securities at prefixed prices. The selling price is derived from the competitive tender bidding price. The government uses the winning investor’s bidding price as the securities’ fair market value and allows non-institutional buyers to purchase the securities at this price. Usually, small investors purchase securities through non-competitive tenders as the price is already fixed, and they don’t have to bid higher for them.
How to Win a Tender?
To win a tender, the bidder needs to follow all tender procedures rules, offer required material and work quality, and offer the lowest bid.
Usually, the lowest price is the most critical criterion in a tender procedure.
Contracting authorities always try to define minimum quality for work and materials and then choose the bidder with the lowest price. In that case, authority can get the cheapest bidder and the best quality for service or supply. However, there are exceptions in consulting tender procedures where usually experience can be a more important criterion than price.
Tender for Buyback of Shares
Tenders for the stock buyback are generally used by public companies who wish to buy back their shares from the shareholders. Companies typically issue tenders intimating the shareholders that they plan to buy back their shares at a specific price for the buybacks. Traders who are willing to sell the shares at the price range mentioned by the company agree with the terms mentioned by the company and can inform the company before the deadline. The public company will mention all the terms of repurchase, price, and the number of shares it is seeking for the repurchase.
An alternative to placing a tender offer is to purchase the shares on the open market. However, it may not be able to get the number of shares it is seeking at the price it is willing to purchase the shares at. Public companies use their accumulated funds to repurchase these shares.
Tender for Government Contractor
Many U.S Federal agencies like the Department of Education, Department of Homeland Security, Defence Contract Management Agency, and Department of Health and Human Services issue tender offers to contractors. This is a big opportunity for businesses as becoming a government contractor helps grow a business. They can sell their goods or services to local, state, or federal agencies and become their contractor.
It is not easy to become a government contractor as the competition is very high. Although the agencies outline all contract requirements, businesses have to prepare competitive proposals that should match requirements and be better than other contractors. Business owners can find out about these tenders through pre-solicitation notices and databases issued by the agencies. All the contract opportunities are listed in the notices and databases so that business owners can know if they can provide the required goods or services.
Tender Offers
The Tender Offer is slightly different from the tender. Whereas in tender, companies issuing the tender are the companies inviting the bidders to bid. However, in the tender offer, the one executing the tender is the bidder. When a company offers to buy a considerable quantity of stocks from its stockholders, it is a tender offer.
Tender offers can be issued in two ways:
- Issuer Tender Offer- When the bidder or the company issuing the tender offer is the owner of the stocks being repurchased.
- Third-Party Tender Offer- When the issuer of the tender is a third-party company and not the companies whose shares are on the offer.
In the public solicitation of the tender offer, the buyback price is usually kept slightly higher than the current market price. More stockholders are attracted to sell the shares. The company’s upper management has a less tender offer if they do not hold a significant amount of shares in the company.
The tender offer has been under constant scrutiny by the U.S government as it becomes a means of hostile take over by third-party companies. If the company planning to take over has a foothold block or owns significant shares, it becomes easy to take over as they would have to issue a tender offer for minimal shares. For these reasons, the tender offer is subject to any regulations. However, the power of transferring shares lies with the shareholders. They can block the transfer by not releasing the shares before the deadline.
Refusal of Tender Offer
The ultimate right to transfer or sell the shares in a tender offer remains with the shareholders. They cannot be forced to sell the shares as they are the owners of the shares. The company placing the tender offer, especially in the case of a public company, offers the repurchase price that includes a premium. This means the tender offer share price is higher than the current market price. If shareholders refuse to sell the shares, they will not gain the premium. By refusing the tender offer, shareholders can sell their shares in the market whenever they find a suitable price for the shares.
However, there are two sides to a coin, and it is the same with the refusal of a tender offer. Instead of gaining, shareholders can also experience a fall in the liquidity of the shares. This happens when a public company is planning to go private.
Dutch Auction Tender Offer
A Dutch Auction Tender Offer is typically an auction for the price of a security that is on offer. A company invites investors to auction the price for the securities it is planning to sell. Investors in the auction intend the price and the number of shares they are willing to purchase. In the end, the price that gets the highest bidding is marked as the issuing price of the security.
Cash Tender Offer
Tender offers can be of many types. One of them is the cash tender offer, where an offer is placed to buy back debt securities, typically bonds. Bonds are issued to investors who lend the funds to the company instead of owning a share in exchange for regular interest payments. Bonds have a maturity date when the principal amount has to be repaid to the investors or bondholders.
The cash tender offer allows the corporation to repay the debt before the maturity date and eliminate the interest payments. The offer price to repurchase the bonds is typically kept higher than the principal amount to attract investors to sell the bonds back to the company.
Conclusion
A tender has a broad scope as it is widely practiced, very common, and can be interpreted in various ways. It can be referred to as invitations to goods or service suppliers, or it can also be referred to as a transfer of ownership. The interpretation changes according to the industries. It also means inviting bidders to be a part of a government project.
Tenders are generally a competition amongst bidders. If a government agency issues the tender, it can be highly beneficial to a business if they get the tender. Therefore, there is immense competition amongst vendors. To maintain a fair tender process, many regulations are imposed on the entire tender procedure that ensures healthy competition and a proper tender selection.
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Promtfinance.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
Contact Daniel: daniel@promtfinance.com