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What is a Competitive Bid?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 November 2016
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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.

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.

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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.

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