Book Building

What is Book Building?

Book building is the cycle by which an underwriter endeavors to determine the price at which a initial public offering (IPO) will be offered. An underwriter, typically an investment bank, builds a book by welcoming institutional investors (like fund managers and others) to submit offers for the number of shares and the price(s) they might want to pay for them.

Understanding Book Building

Book building has outperformed the 'fixed pricing' method, where the price is set prior to investor participation, to turn into the de facto mechanism by which companies price their IPOs. The course of price discovery includes generating and recording investor demand for shares before showing up at an issue price that will fulfill both the company offering the IPO and the market. It is highly recommended by every one of the major stock exchanges as the most efficient method for pricing securities.

The book building process includes these means:

1. The responsible company enlists an investment bank to act as a underwriter who is entrusted with determining the price range the security can be sold for and drafting a prospectus to convey to the institutional investing community.
2. The investment bank welcomes investors, ordinarily large scale purchasers and fund managers, to submit offers on the number of shares that they are interested in buying and the prices that they might want to pay.
3. The book is 'worked' by listing and assessing the totaled demand for the issue from the submitted offers. The underwriter examines the data and utilizations a weighted average to show up at the last price for the security, which is termed the cutoff price.
4. The underwriter needs to, for transparency, publicize the details of the relative multitude of offers that were submitted.
5. Shares are allocated to the accepted bidders.

Even in the event that the data collected during the book building process recommends a particular price point is best, that doesn't guarantee a large number of actual purchases once the IPO is available to purchasers. Further, it's anything but a requirement that the IPO be offered at that price suggested during the analysis.

Accelerated Book Building

A accelerated book-build is much of the time utilized when a company is needing financing, in which case, debt financing is impossible. This can be the case when a firm is hoping to make an offer to procure another firm. Fundamentally, when a company can't get extra financing for a short-term project or acquisition due to its high debt obligations, it can utilize an accelerated book-build to get quick financing from the equity market.

With an accelerated book build, the offer period is open for only a couple of days and with practically zero marketing. At the end of the day, the time among pricing and issuance is 48 hours or less. A book build that is accelerated is regularly executed overnight, with the responsible company contacting a number of investment banks that can act as underwriters on the evening prior to the intended placement. The issuer solicits offers in a closeout type cycle and awards the underwriting contract to the bank that commits to the highest backstop price. The underwriter submits the proposal with the price reach to institutional investors. In effect, placement with investors comes about by accident more or less with the security pricing happening most frequently inside 24 to 48 hours.

IPO Pricing Risk

With any IPO, a risk of the stock is being overpriced or undervalued when the initial price is set. Assuming it is overpriced, it might deter investor interest in the event that they are not certain that the company's price compares with its actual value. This reaction inside the marketplace can make the price fall further, bringing down the value of shares that have previously been secured.

In cases where a stock is undervalued, it is considered to be a botched opportunity with respect to the responsible company as it might have created a greater number of funds than were acquired as part of the IPO.

Highlights

• The course of price discovery includes generating and recording investor demand for shares before showing up at an issue price.
• Book building is the interaction by which an underwriter endeavors to determine the price at which an initial public offering (IPO) will be offered.
• Book building is the de facto mechanism by which companies price their IPOs and is highly recommended by every one of the major stock exchanges as the most efficient method for pricing securities.