Bought Deal
What Is a Bought Deal?
A bought deal is a securities offering in which an investment bank commits to buy the whole offering from the client company. A bought deal disposes of the responsible company's financing risk, guaranteeing that it will raise the expected amount. On the flip side, adopting this strategy, as opposed to pricing the offering through the public markets with a preliminary prospectus filing, as a rule brings about the client firm getting a lower price.
Grasping Bought Deals
A bought deal is generally risky for the investment bank. This is on the grounds that the investment bank must pivot and try to sell the acquired block of securities to different investors for a profit. The investment bank expects the risk of a potential net loss in this scenario, as the securities could lose value and sell at a lower price, or not sell by any means.
To offset this risk, the investment bank frequently arranges a critical discount while buying the offering from the responsible client. Assuming that the deal is large, an investment bank might team up with different banks and form a syndicate, so that each firm bears just a portion of the risk.
Bought Deals and Other Forms of Initial Public Offerings
There are several sorts of initial public offerings (IPOs). Two common methods, fixed price and book building IPOs, are like bought deals in that they can bring about a fully subscribed IPO. A company can utilize fixed price and book building IPOs separately or combined, and a bought deal can utilize these methods for reselling the securities too.
In a fixed price offering, the company opening up to the world (the responsible company) decides a set price at which it will offer its shares to investors. In this scenario, investors realize the share price before the company opens up to the world. Investors must pay the full share price while applying for participation in the offering.
In book building, a underwriter will endeavor to decide a price at which to offer the issue. The underwriter will base this price point on demand from institutional investors. As an underwriter fabricates their book, they acknowledge orders from fund managers. Fund managers will show the number of shares they want and the price they will pay.
The Role of the Underwriter in Bought Deals
In all forms of IPOs, including bought deals, the underwriters or potentially a syndicate of underwriters will work with some or the entirety of the accompanying:
- The formation of an outer IPO team, comprising of an underwriter(s), legal counselors, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) specialists
- The assemblage of point by point company information, including financial performance and expected future tasks
- The submission of financial statements for official review
In many forms of IPOs, then again, actually of a bought deal, underwriters will support the gathering and filing of a preliminary prospectus with the SEC prior to setting the offering date. In a bought deal, the issue is purchased by the underwriter before the preliminary prospectus is recorded. Once more, this leaves the underwriters with capital tied up in a stock they need to dump — ideally for a profit.
Features
- A bought deal for the most part leans toward the responsible company as in there is no risk to the financing — the company will get the money it needs.
- The investment bank faces extra risk challenges carrying out a bought deal since it must have the option to sell the securities — ideally for a profit.
- Bought deals basically put the investment bank long the company stock while likewise tying up capital. In return for facing this risk, challenges investment bank as a rule gets the securities at a discount to the projected market value.
- A bought deal happens when an investment bank consents to purchase a whole issue from the issuer, and afterward resell it later.
