Definition
“Issue by tender” (or sale by tender) is a financial mechanism employed by companies or issuing houses where they request potential investors to tender, or submit bids, for a newly issued batch of shares or other securities. The shares are then distributed to the highest bidders, as long as their bids meet or exceed a predefined minimum price outlined in the tender documents. This method is less commonly used compared to other methods, such as a public issue.
Examples
-
Company IPO: A corporation planning to go public might use an issue by tender rather than a traditional Initial Public Offering (IPO). Qualified bidders submit their bids, and those who bid the highest receive the shares, thereby ensuring that the company maximizes the capital raised per share.
-
Government Bonds: A government looking to raise funds may opt for an issue by tender methodology, requiring financial institutions or high net-worth individuals to place bids. The highest bidders receive the bonds, provided their bids meet the minimum stipulated amount.
-
Real Estate Shares: A real estate company launching a Real Estate Investment Trust (REIT) might use the issue by tender method, asking institutional investors to tender bids. The allocation would thus prioritize the highest bids, potentially increasing initial funding.
Frequently Asked Questions (FAQs)
What is the main advantage of using an issue by tender?
The main advantage is that it can potentially yield the highest possible price for the new issue of shares or securities, thereby maximizing the issuer’s proceeds.
Are there any disadvantages to issue by tender?
Yes, the method may deter smaller investors due to the potentially high bids required, and it involves complexities in managing and assessing numerous bids.
How does issue by tender compare to a public issue?
In an issue by tender, the allocation is based on bid prices, often leading to an expedited sale and potentially higher prices. Public issues typically involve selling shares at a fixed price, accessible to a broader range of investors, including small retail investors.
When is issue by tender used?
This method is used in scenarios where the issuer aims to capitalize on market conditions that suggest high demand, thereby potentially securing better prices through competitive bids.
Is there a regulatory oversight for issue by tender?
Yes, issuers must comply with regulatory frameworks and securities laws of their jurisdictions to ensure a fair and transparent tender process.
- Public Issue: The process of selling shares or securities to the general public at a fixed price.
- IPO (Initial Public Offering): The first sale of stock by a private company to the public.
- Underwriting: The process where an underwriter evaluates and undertakes the risk of issuing shares and guarantees that all shares will be sold.
- Book Building: A process to determine the optimal price at which an IPO should be offered based on investor demand.
Online Resources
- Investopedia: Public Offering
- SEC: Initial Public Offerings (IPOs)
- Nasdaq: What is an IPO?
Suggested Books
- “Initial Public Offerings: An International Perspective” by Greg N. Gregoriou and Luc Renneboog
- “The New IPO Market: A Guidebook for Executives and Boards Considering an IPO” by Dennis C. Carey and Michael S. Kearney
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Joshua Rosenbaum and Joshua Pearl
Accounting Basics: “Issue by Tender” Fundamentals Quiz
### What is an issue by tender?
- [ ] A traditional method of issuing shares where price is fixed.
- [ ] A charity event where shares are sold for a social cause.
- [ ] A method where the price of shares is determined by highest bids.
- [] A method where shares are given away to charity.
> **Explanation:** An issue by tender involves inviting investors to submit bids for shares, and the shares are allocated to the highest bidders.
### What is typically stated in the tender documents of an issue by tender?
- [ ] The expected list of investors.
- [ ] The company mission statement.
- [x] The lowest price acceptable for bids.
- [ ] The business operational plans for the next decade.
> **Explanation:** Tender documents usually state the lowest price acceptable for bids to ensure that only those meeting this minimum price are allocated shares.
### What is a key advantage of an issue by tender?
- [x] Possibly obtaining the highest price for shares.
- [ ] Guaranteed participation by small investors.
- [ ] Simplified regulatory requirements.
- [ ] Pre-determined return on investment.
> **Explanation:** The competitive bidding process can potentially yield higher prices for the shares, maximizing returns for the issuer.
### When compared to a public issue, what is true about an issue by tender?
- [ ] It is designed to benefit small investors primarily.
- [x] It involves share allocation based on bids.
- [ ] It always results in lower share prices.
- [ ] It is simpler to execute.
> **Explanation:** In an issue by tender, shares are allocated to investors based on the highest bids, unlike a public issue where shares are typically sold at a fixed price.
### What could deter small investors from participating in an issue by tender?
- [ ] The complexity of the bidding process.
- [x] The potentially high bidding prices.
- [ ] Lack of transparency.
- [ ] Regulatory restrictions.
> **Explanation:** High bidding prices in the competitive tender process may make it less appealing or feasible for small investors to participate.
### Which scenario might favor the use of an issue by tender?
- [x] A situation of high market demand for the security.
- [ ] Absence of institutional interest.
- [ ] Regulatory complications.
- [ ] Low urgency to raise capital.
> **Explanation:** When market conditions indicate high demand for the securities, issuing them by tender can maximize the price realized for the shares.
### What is one possible downside of the issue by tender method?
- [ ] Guaranteed low bids.
- [x] Exclusion of smaller, less affluent investors.
- [ ] High regulatory flexibility.
- [ ] Lower publicity.
> **Explanation:** The competitive nature and potentially high bid prices can exclude smaller investors, limiting their participation.
### Who primarily benefits financially in an issue by tender?
- [ ] Regulatory authorities.
- [ ] Small retail investors.
- [ ] Brokers.
- [x] The issuer.
> **Explanation:** The issuer potentially achieves a higher price for the shares through competitive bidding, maximizing capital raised.
### What is the typical role of investment bankers in an issue by tender?
- [x] Facilitate the tender process and manage bids.
- [ ] Purchase the remaining unsold shares.
- [ ] Protect small investors' interests.
- [ ] Provide personal loans to bidders.
> **Explanation:** Investment bankers facilitate the tender process, manage bids, and ensure smooth execution of the allocation to the highest bidders.
### Can an issue by tender be used for bond issuance?
- [x] Yes, governments and corporations can use tender for bonds.
- [ ] No, it is exclusive to equities.
- [ ] Only in initial public offerings.
- [ ] Exclusively for private placements.
> **Explanation:** Governments and corporations can use an issue by tender to allocate bonds to the highest bidders, similar to equities.
Thank you for diving into our comprehensive guide on the intricacies of “Issue by Tender” and tackling our sample quiz designed to test and enhance your financial knowledge!
