What is Book Building?

Book building is the process by which an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered.▨ An underwriter, normally an investment bank, builds a book by i💜nviting institutional investors (such as fund managers and others) to submit bids for the number of shares and the price(s) they would be willing to pay for them.

Understanding Book Building

Book building has surpassed the 'fixed pricing' method, where the price is set prior to investor participation, to become the de facto mechanism 澳洲🐻幸运5官方开奖结果体彩网:by which companies price their IPOs. The process of price discovery involꦉves generating and recording investor demand for shares before arriving at an issue price that will satisfy both the company offering the IPO and the market. It is highly recommended by all the major stock exchanges as the most efficient way to price securities.

The book bui🧔lding process comprises these steps:

1. The issuing company hires an investment bank to act as an 澳洲幸运5官方开奖结果体彩网:underwriter who is tasked with determining the price range the security can be sold for and drafting a 澳洲幸运5官方开奖结果体彩网:prospectus to send out to the institutional investing community.
2. The investment bank invites investors, normally large scale buyers and fund managers, to submit bids on the number of shares that they are interested in buying and the prices that they would be willing to pay.
3. The book is 'built' by listing and evaluating the aggregated demand for the issue from the submitted bids. The underwriter analyzes the information and uses a weighted average to arrive at the final price for the security, which is termed the 澳洲幸运5官方开奖结果体彩网:cutoff price.
4. The underwriter has to, for the sake of transparency, publicize the details of all the bids that were submitted.
5. Shares are allocated to the accepted bidders.

Even if the information col🌟lected during the book building process suggests a particular price poin🍒t is best, that does not guarantee a large number of actual purchases once the IPO is open to buyers. Further, it is not a requirement that the IPO be offered at that price suggested during the analysis.

Accelerated Book Building

An 澳洲幸运5官方开奖结果体彩网:accelerated book-build is often used when a company is in immediate need of financing, in which case, 澳洲幸运5官方开奖结果体彩网:debt financing is out of the question. This can be the case when a firm is looking to make an offer to acquire another firm. Basically, when a company is unable to obtain additional financing for a short-term project or acquisition due to꧑ its high debt obꦦligations, it can use an accelerated book-build to obtain quick financing from the equity market.

With an accelerated book build, the offer period is open for only one or two days and with little to no marketing. In other words, the time between pricing and issuance is 48 hours or less. A book build that is accelerated is frequently implemented overnight, with the issuing company contacting a number of investment banks that can serve as underwriters on the evening prior to the intended placement. The issuer solicits bids in an auction-type process and awards the underwriting contract to the bank that commits to the highest 澳洲幸运5官方开奖结果体彩网:backstop price. The underwriter submits the proposal with the price ꦬrange to institutional investors. In effect, placement with investors happens overnight with the security pricing occurring mಌost often within 24 to 48 hours.

IPO Pricing Risk

With any IPO, there is a risk of the stock being overpriced or undervalued when the initial price is set. If it is꧂ overpriced, it may discourage investor interest if they are not certain that the company’s price corresponds with its actual value. This reaction within the marketplace can cause the price to fall further, lowering the value of shares that have already been secured.

In ca🎉ses where a stock is undervalued, it is considered to be a missed opportunity on the part of the issuing company as it could have generated more funds than were acquired as part of the IPO.