What Is a Tender?

A tender is an invitation to bid for a project or accept a formal offer such as a takeover bid. Tendering usually refers to the process whereby governments and financial institutions invite bids for large projects that must be submitted within a finite deadline. The term also refers to the process whereby shareholders submit their shares or securities in response to a takeover offer.

Key Takeaways

  • Tender usually refers to the process whereby governments and financial institutions invite bids for large projects that must be submitted within a finite deadline.
  • A tender offer is a public solicitation to all shareholders requesting that they tender their stock for sale at a specific price during a certain time.
  • A request for tender (RFT) is a formal and structured invitation to suppliers to submit competitive bids to supply raw materials, products, or services. 
  • The term tender also refers to the process whereby shareholders submit their shares or securities in response to a takeover offer.
  • Large institutional investors buy government securities through a competitive tender process, while smaller investors buy government securities through a non-competitive tender process.


How a Tender Works

For projects or procurements, most institutions have a well-defined tender process, as well as processes to govern the opening, evaluation, and final selection of the vendors. This ensures that the selection process is fair and transparent. When it comes to tender offers for takeover attempts, the conditions of the offer are clearly listed and include the purchase price, the number of shares requested, and a deadline for a response.

A request for tender (RFT) is a formal and structured invitation to suppliers to submit competitive bids to supply raw materials, products, or services. Because this is a public and open process, laws were created to govern the process to ensure fair competition among bidders.

For example, without laws, bribery and nepotism may flourish. Tender services are available for potential bidders and include a wide range of tenders from private and public sources. These services include crafting suitable bids, coordinating the process to ensure deadlines are met, and ensuring compliance with applicable laws.

In the private sector, requests for tenders are referred to as requests for proposals (RFPs)—which allows potential bidders to respond to the defined needs of the issuer.

Special Considerations

A tender offer is a public solicitation to all shareholders requesting that they tender their stock for sale at a specific price during a certain time. To entice shareholders to release a specific number of shares, the offer typically exceeds the current market value of the shares. In the U.S., tender offers are highly scrutinized and subject to extensive regulation.

Since the deal targets shareholders directly, it effectively removes upper management from the process, unless those members of management are also substantial shareholders. If the company looking to take over already has a notable share of the target company, referred to as a foothold block, a minority of the remaining shareholders may be enough to allow the company making the offer to become the majority shareholder.

However, if the requested shares are not released by the deadline, the deal is often considered void, effectively allowing shareholders to block the deal.

Competitive Tender vs. Non-Competitive Tender

The terms competitive tender and non-competitive tender refer to two different methods governments use to sell government securities. In the United States, the government sells Treasury securities—such as bonds, bills, and notes—to help fund the government's operations. Individual investors, commercial banks, corporations, pension funds, brokers, and dealers are some of the typical buyers of government securities. In exchange for investing in these securities, buyers will receive the government's promise of full repayment at maturity along with a specified interest payment.

There are two ways that investors can purchase government securities—through a competitive tender and a non-competitive tender. A competitive tender is a bidding process in which large institutional investors buy newly issued government securities. These institutional investors compete with one another to purchase the securities in an auction. The investor that bids the highest will win the auction and can purchase the security at the bid price.

Smaller, non-institutional investors purchase government securities through a non-competitive tender process. The price for these securities is set by the large institutional investors during the competitive tender. For example, when the U.S. Treasury auctions securities to large institutional investors, it will use the winning bid to establish the fair market value for its securities. It will then use this value to set the price that smaller investors will pay during the non-competitive tender.

The U.S. Treasury issues bonds in a term of 20 years or 30 years and pays a fixed interest rate every six months until they mature.

Examples of Tender

Bidding on U.S. Government Projects

In the U.S., many business owners look to expand their businesses by becoming a government contractor with federal, state, or local governments. They sell services or goods to governments and a variety of agencies. Federal agencies that routinely buy from contractors include the Defense Contract Management Agency, Department of Energy, Department of Education, Department of Health and Human Services, and Department of Homeland Security.

Becoming a contractor requires businesses to compete with one another by presenting proposals and quotes based on the requirements outlined by the government or agency in their invitation to tender (also referred to as a "call for bids"). The U.S. federal government lists contract opportunities in a searchable database that helps business owners match open opportunities with the products or services they offer. The database also lists pre-solicitation notices, solicitation notices, and award notices.

Stock Buyback

A stock buyback is when a publicly traded company decides to use its accumulated cash to buy back its own shares. There are two ways a company can accomplish this. They can either buy the shares via the open market or they can make a tender offer.

If the company opts to make a tender offer, they will send their shareholders a notice requesting to repurchase some or all of their shares. The tender offer will state the terms of the repurchase, including the price range for the shares, the number of shares the company seeks to repurchase, and the deadline for shareholders who want to sell their shares back to the company.

For example, on Dec. 13, 2021, Dell Technologies Inc. (DELL) announced it had closed a tender offer to repurchase shares of the company's securities. To fund the stock buyback, the company used cash on hand along with the net proceeds from the sale of $2.25 billion of senior notes.

What Is a Tender Offer?

A tender offer is when a publicly traded company or a third party offers to purchase a significant amount of the company's stock from current shareholders. The bidder is the party conducting the tender offer. If the bidder is a third party, then this is referred to as third-party tender offer. If the bidder is the company that is looking to buy its own stock back, then this is called a issuer tender offer.

What Is a Cash Tender Offer?

A cash tender offer is when a corporation makes a public offer to buy back some or all of its debt securities. A debt security, such as a corporate bond, is a type of investment the corporation sells to investors. In exchange for lending the corporation money, the investor will receive a bond that requires the corporation to pay the investor regular interest payments and repay the principal amount at the bond's maturity date.

When a corporation makes a cash tender offer, they are requesting that bond owners sell back their bonds to the corporation for a specified price. This enables the corporation to retire the bonds and reduce the outstanding debt obligations on their financial statements.

What Is a Dutch Auction Tender Offer?

A Dutch auction tender offer refers to a process for determining a security's price. Investors interested in purchasing a security will place a bid indicating the amount they are willing to pay and the quantity they would like to buy. The offering price for the security will be the price with the highest number of bidders.

What Happens If You Refuse a Tender Offer?

A stockholder is under no obligation to accept a tender offer. They can reject the tender offer and continue to own their shares. In this case, they will not directly benefit from any premium in share price they might have gained had they elected to sell their shares to the bidder. They can choose to sell their shares for whatever the market price is at a later date.

It's important to note, however, that the stockholder may risk losing money if they reject a tender offer in the case of a publicly traded company that is looking to go private. In this scenario, the stock may become less liquid over time, making it difficult for the stockholder to sell their stock.

The Bottom Line

Tender is an often-used term in business, finance, and investing that can have various meanings. In a business setting, tender refers to the process where governments invite vendors to bid for the right to work on government projects or provide goods or other services.

When purchasing government securities—such as U.S. Treasury bills, bonds, and notes—a tender has a different meaning. It refers to the bidding process in which investors purchase these securities. In a stock buyback, a tender offer refers to a corporation's solicitation to repurchase its stock from shareholders. Other uses of the term include short tender and hedged tender.

Article Sources

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  1. Legal Information Institute, Cornell Law School. "22 CFR Sec. 201.22 - Procurement Under Public Sector Procedures." Accessed Dec. 31, 2021.

  2. U.S. Department of Justice. "Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look For." Accessed Dec. 31, 2021.

  3. U.S. Securities and Exchange Commission. "Tender Offer." Accessed Dec. 31, 2021.

  4. Treasury Direct. "Treasury Bonds." Accessed Dec. 31, 2021.

  5. U.S.A.gov. "Get Help With Government Contracting." Accessed Dec. 31, 2021.

  6. PR Newswire. "Dell Technologies Announces Early Results and Increase of Tender Cap and Maximum Tender Amount for Cash Tender Offers for Certain Outstanding Debt Securities." Accessed Dec. 31, 2021.

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