fusion point research Marketing Research Reports

Marketing to Equity Underwriting & IPO Leaders in Investment Banking

Understanding Their Role

Many times even large organizations need to raise substantial sums of money to grow their businesses, or to expand into new opportunities. There are several ways to raise this money, including borrowing money from banks, issuing bonds or entering into an agreement with a venture capital firm. Another option is a public offering of equity (or partial ownership) in the company. The first time a company uses this approach is called an Initial Public Offering, often referred to as an IPO. In an IPO, shares of stock in a company are sold to institutional investors, who then sell these shares to the general public. This is why participating in an IPO is commonly called “going public”.

 

When a company decides to go public they need to hire an underwriter, which is an investment bank with expertise in IPOs. Sometimes when an IPO is very large, they will hire a group of banks to handle it. This group of banks is referred to as “the syndicate”. The investment bank that wins the mandate to run an issue of new securities is referred to as the lead manager or the bookrunner.1 When selecting an underwriter, the prospective issuer considers reputation, experience, distribution and market making capabilities, fees, research coverage, and after-offering services.2

 

Besides the underwriter, there are other key groups and individuals that participate on the “IPO team”. The team usually consists of the management and the company's legal counsel, independent accountants, financial consultants and advisors. In some cases, a public relations firm is also involved. The quality of the management team is one of the most important factors in a successful IPO.3

 

Once the team is in place, the following are the steps that generally take place during an IPO:

 

  • The banks estimate the value of the company so they can set a range for the price of the stock to be offered, and determine how many stock shares will be issued.
  • Detailed financial statements about the company are produced that must meet strict SEC requirements. The company’s legal counsels carefully review these documents before submitting them to the SEC.
  • The files are then registered with the SEC- this “registration statement” also includes the prospectus, which informs the public of the IPO and contains considerable information about the issuer. Sometimes the SEC requires changes be made to the prospectus so that it meets disclosure requirements. Once the company files the registration statement with the SEC, the quiet period (or waiting period) begins and extends until the SEC staff declares the registration statement effective. During that period, the federal securities laws limit what information a company and related parties can release to the public.
  • Up next is the “road show” where the salespeople from the banks travel to educate potential investors about the IPO and to gauge interest in the IPO. These investors provide feedback regarding their levels of interest in the stock and how much they might be willing to pay per share.
  • When the company believes they have sufficient demand built up for the stock and what the price of the stock should be, they ask the SEC to declare their registration statement “effective”. The initial stock price is then set.
  • Once the SEC declares the registration statement effective, the lead underwriter “allocates” shares to institutional investors.4

 

There are some disadvantages to a company in going public. First of all, there is a lack of operating confidentiality resulting from the filing of the registration statement and meeting the subsequent reporting requirements. Some particularly sensitive areas of disclosure are remuneration (pay) packages for the top five employees and extensive company financial information. Once the company becomes publicly owned, the management is under constant pressure to enhance short-term performance. The requirement that the board of directors or shareholders approve on certain management decisions could cause delays or missed opportunities. Furthermore, if a substantial portion of shares is sold to the public, the original owners could lose control of the company. Finally, the process of going public is expensive and time consuming. The expenses include underwriting discount, counsel fees, printing costs, and other incidental costs.

 

IPOs are very important to investment banks because of the fees they generate. The underwriting fees for these IPOs have averaged 7% of the proceeds raised by the issuer. As a result investment banks take in tens of billions of dollars in underwriting revenue every year.5

 

“…these six banks pocketed $266 million in total fees from the IPO – an 89% share of the $300 million in total fees paid by Alibaba. Morgan Stanley and Credit Suisse gained the most with revenues of $50.5 million each.” – Forbes on the Alibaba IPO6

1 Liaw K. Thomas. The Business of Investment Banking: A Comprehensive Overview . 3rd ed. Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030.

2 Ibid

3 Ibid

4 Stowell, David. Investment Banks, Hedge Funds, and Private Equity . 2nd ed. 225 Wyman Street, Waltham, MA 02451, USA The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1 GB, UK: Academic Press, 2012.

5 Liaw K. Thomas. The Business of Investment Banking: A Comprehensive Overview

6 Trefis Team. “Alibaba Hands Out Generous Fees To Investment Banks Involved In Its IPO”. Forbes. October 2014. Accesses 11/20/15, available at: www.forbes.com/sites/greatspeculations/2014/10/01/alibaba-hands-out-generous-fees-to-investment-banks-involved-in-its-ipo

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Copyright © 2016 Fusion Point Research, Inc.

Companies utilize Public Offerings to raise funds in exchange for partial ownership of the corporation. Investment bankers provide this service using process called underwriting. Fees from Public Offerings represent a substantial portion of an Investment Bank’s revenue.
fusion point research Marketing Research Reports
Companies utilize Public Offerings to raise funds in exchange for partial ownership of the corporation. Investment bankers provide this service using process called underwriting. Fees from Public Offerings represent a substantial portion of an Investment Bank’s revenue.
  • The banks estimate the value of the company so they can set a range for the price of the stock to be offered, and determine how many stock shares will be issued.
  • Detailed financial statements about the company are produced that must meet strict SEC requirements. The company’s legal counsels carefully review these documents before submitting them to the SEC.
  • The files are then registered with the SEC- this “registration statement” also includes the prospectus, which informs the public of the IPO and contains considerable information about the issuer. Sometimes the SEC requires changes be made to the prospectus so that it meets disclosure requirements. Once the company files the registration statement with the SEC, the quiet period (or waiting period) begins and extends until the SEC staff declares the registration statement effective. During that period, the federal securities laws limit what information a company and related parties can release to the public.
  • Up next is the “road show” where the salespeople from the banks travel to educate potential investors about the IPO and to gauge interest in the IPO. These investors provide feedback regarding their levels of interest in the stock and how much they might be willing to pay per share.
  • When the company believes they have sufficient demand built up for the stock and what the price of the stock should be, they ask the SEC to declare their registration statement “effective”. The initial stock price is then set.
  • Once the SEC declares the registration statement effective, the lead underwriter “allocates” shares to institutional investors.