What is a tender? The term ‘tender’ has two meanings today in business and finance. One concerns the award of contracts by the government or private institutions, and the other involves the acquisition of shares on the stock market during a takeover bid.
Regarding the procurement of services, whenever the government or a private institution needs to solicit services for a project, it undertakes a ‘tendering’ process to invite bids, for the work, within a fixed timeframe. Selecting a vendor goes through three phases – opening, assessment, selection, and facilitates transparency and fairness.
Concerning dealings in capital markets, whenever businesses look to acquire other companies, which have shares listed on the stock market, they tender offers to shareholders as part of an acquisition strategy. The offer arrives with its conditions – the purchase price, the deadline for accepting the offer and the number of shares being targeted as part of the takeover bid.
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Other usages of the word ‘tender’ in business and finance are legal tender and cost of tender.
Legal tender is a thing granted the right by regulation to be utilised as payment to fulfil a financial obligation or settle private or public debt. On the other hand, the cost of tender represents all costs undertaken to deliver and certify commodities in a futures contract.
Tendering: Procurement of Services/Products
A Request for Tender (RFT) is an official and organised invitation to businesses to bid to provide services, products or raw materials competitively. The process is transparent and public, with laws regulating the process with the end goal being fair competition. Devoid of regulation, the process would deteriorate and get hijacked by nepotism and bribery. In response to tendering, potential bidders have to provide appropriate bids, comply with regulations and meet deadlines.
The public and private sectors utilise the open tender process, which is considered the primary procedure for tendering. The client calls for bids utilising the e-tender platform or print advertisements, and the tender carries key information concerning the proposed project to invite suppliers and contractors. The open tender process is called ‘public bidding. The contractors and suppliers submit offers that are evaluated. The client then awards the contract to the bidder that meets the stipulations of the tender.
The selective tender process evolved in response to the limitations of the open tender process. This alternative tendering process enhances the quality of bids and allows contractors with the desirable know-how to get the opportunity to offer bids within the given timeframe. The client might add a pre-qualification phase to choose firms from whom bids will be invited.
Tendering: Takeover Offer to Shareholders and Buying Govt Securities
A tender offer is put out by a company, looking to acquire another company, as an open request to shareholders of the target company listed on a stock market. The offer calls on the target company's shareholders to sell their stock for a definite price within a fixed timeframe. The offer generally consists of a premium over and above the present market value of the stock to lure the target company's shareholders to part with a definite amount of shares. In certain countries, tender offers are governed by laws and are the subject of intense scrutiny.
As the tender offer targets shareholders, it bypasses the upper management unless management personnel possess a significant holding in the target company. Sometimes the company looking to make the acquisition possesses a foothold block in the target company, and a foothold block is a substantial shareholding in the target company. In this case, the remaining shareholders who are a minority can sell their shares and make the acquirer a majority shareholder. However, the shareholders are capable of annulling the deal, thereby making it void, if they do not release the requested shares within the specified timeframe.
Non-Competitive Tender Versus Competitive Tender
Investors can buy government securities via a non-competitive tender and a competitive tender. Non-institutional investors are allowed to buy government securities via a non-competitive tender. Meanwhile, institutional investors purchase government securities via a competitive tender process.
Institutional investors participate in a competitive tender that involves bidding for government securities in an auction. The investor with the highest bid wins the auction and buys the securities at the price that won the auction. Following this process, non-institutional investors can buy the securities at a price set by the competitive tender but as part of a non-competitive tender. As a result, the competitive tender sets the fair market value of the securities.
Example of Tender
A company listed on the stock market can utilise cash on hand to purchase its shares from shareholders. This process is known as stock buyback, and the company undertakes such activity in two ways, they either put out a tender offer or purchase shares on the open market.
When making a tender offer, the company will notify shareholders about its intention to repurchase a specific amount of shares or its entire paid-up capital. The tender offer will include the price of shares, the timeframe for such activity and the number of shares that the company intends to buy back as part of the conditions of the stock buyback process.
Therefore, the term ‘tender’ has several meanings in business and finance. Concerning business, the tendering process concerns how governments call on contractors to bid for projects involving the provision of services and goods. In capital markets, the tendering process concerns how businesses acquire other companies on the stock market, how investors buy government securities and how companies buy back stock from shareholders.
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