Tender in Finance Definition: How It Works, With Example

What Is a Tender?

The term tender refers to an invitation to bid for a project. 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 word tender can also refer to the acceptance of a formal offer, such as a takeover bid. This form of tendering is the process whereby shareholders submit their shares or securities in response to a takeover offer.

How a Tender Works

As noted above, a tender is a term used in business to refer to an invitation by governments and other entities to submit a bid for contracts. Most institutions have a well-defined tender process for projects or procurements. There are also specific processes in place to govern the opening, evaluation, and final selection of the vendors. This ensures that the selection process is fair and transparent.

A request for tender 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.

Tender vs. Tender Offer

Don't confuse the term tender with a tender offer, which most people often do. The latter 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.

For example, on Dec. 13, 2021, Dell (DELL) announced it 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.

Since the deal targets shareholders directly, it effectively removes upper management from the process, unless those members of management are also substantial shareholders. If an acquiring company already has a notable share of the target company (which is referred to as a foothold block), a minority of the remaining shareholders may be enough to allow the offering company to become the majority shareholder.

If the requested shares are not released by the deadline, the deal is often considered void. If this happens, it effectively allows 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 (FMV) for its securities. It will then use this value to set the price that smaller investors will pay during the non-competitive tender.

Examples of Tender

In the U.S., many business owners look to expand their businesses by becoming government contractors 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. This process is 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.

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.