Competitive bids are private bids that are provided to an issuer by an underwriter. The terms and conditions associated with the competitive bid are sealed, and therefore only known by the underwriter and the issuer. This process of submitting a sealed bid helps to ensure that the offers received from underwriters are judged on their own merits, and are not the result of negotiations between the issuer and the underwriters.
The competitive bid is normally a process that is open to only a select number of underwriting entities. Essentially, an entity that is about to issue some type of new securities will contact underwriters and invite them to submit sealed bids. Often, the entity will include an outline for the format that is required to participate in the bidding process. This formal request for bids helps to keep the structure of each submitted competitive bid uniform with all other sealed bids that are received.
Once the issuer receives a competitive bid, the process of evaluation will begin. The issuer will look at the price offered by the underwriter, as well as the process that will be used to promote and process the securities. Typically, the issuer is concerned about the price, but the working terms can also play a huge role in selecting an underwriter. In the best case scenario, the issuer is able to identify a competitive bid that includes the lowest price and the most agreeable of terms and conditions.
There are several business entities that make use of the competitive bid on a regular basis. Municipalities are one of the most common examples. The opportunity to bid on the municipal securities is normally a closed process, with only a select few underwriters invited to participate. Participation is often based on past favorable dealings with the underwriter, or a reputation for high ethics and efficiency.
Along with municipalities, utility companies and cooperatives, and transportation businesses such as railroads are known to make regular use of the competitive bid. However, there are also examples of manufacturing companies, telecommunication service providers, and manufacturing corporations also making use of the competitive bid format.
