Corporate Finance: Underwriting
and syndication
Presented By
Mushfiq Ahmed
ID 52310004
Course Name
Investment & Merchant banking
Public offering Vs Private Placement
A public offering (PO) is the sale of securities to the general public. This
can be done through an initial public offering (IPO), which is when a
company first sells its shares to the public, or through a secondary
offering, which is when a company sells existing shares to the public.
A private placement is the sale of securities to a select group of
investors, such as accredited investors or institutional investors. Private
placements are typically exempt from the same regulations as public
offerings, such as the need to file a registration statement with the
Securities and Exchange Commission (SEC).
Functions of investment bank in IPO
Investment bank performed as intermediary between issuer and
investors. In these regard they perform three major functionsa)
Origination
b)
Underwriting
c)
Distribution
Origination
The origination process typically begins with an investment banker
meeting with a potential client to discuss their financial needs. The
investment banker will then work with the client to develop a financial
solution that meets those needs. This solution could involve issuing a new
security, such as a bond or stock, or it could involve restructuring the
client's existing debt.
The due diligence investigation
Due diligence investigation is an important part of the origination stage
in investment banking. It is the process of gathering information and
assessing the risks involved in a potential investment.
SEC Filling
The next step in the process is to file the appropriate documents
including preliminary prospectus with the SEC to begin the registration
process.
Underwriting
The underwriting process begins once the investment banker has
developed a financial solution for the client. The investment banker will
then guarantee the sale of the new security to investors. This means that
the investment banker is obligated to buy the security from the client if
it is not sold to investors. The investment banker is compensated for this
risk by charging a fee.
The are three type of undertakings
A)
Firm Commitment
B)
Best Effort
C)
Standby
Types of Underwriting
Firm commitment underwriting is the most common type of underwriting
arrangement. Under a firm commitment underwriting, the investment bank agrees to
purchase all of the securities being offered by the issuer. This means that the
investment bank is taking on the risk that it will not be able to sell all of the
securities to investors.
Best effort underwriting is a less risky type of underwriting arrangement for the
investment bank. Under a best effort underwriting, the investment bank agrees to use
its best efforts to sell the securities being offered by the issuer. However, the
investment bank is not obligated to purchase any of the securities if it is unable to
sell them to investors.
Stand-by underwriting is a hybrid of firm commitment and best effort underwriting.
Under a stand-by underwriting, the investment bank agrees to purchase all of the
securities being offered by the issuer if the investment bank is unable to sell them to
investors. However, the investment bank is not obligated to purchase any of the
securities unless it is unable to sell them to investors.
Distribution
The distribution process is the process of selling the new security to
investors. This can be done through a variety of channels, such as
through investment banks, broker-dealers, or directly to investors. The
investment banker will work with the client to select the best
distribution channels for the new security.
Thank You