Book Building : What is it?

Book Building: What is it?

Prices for initial public offerings (IPOs), are set by the underwriters. Book building is the process by which an underwriter determines the price at which the IPO will be made public. The underwriter for an IPO is usually an investment bank. This party sets the price by inviting institutional investors such as fund managers to submit bids for the amount they are willing to pay to purchase a set number of shares.

Book building is how an underwriter determines the price at which an IPO will be made public. The book building process is about generating and maintaining records of investor demand before the underwriter determines the price. Book building is often used by companies to price their IPOs. This method is highly recommended by major stock exchanges and is the most efficient way of pricing securities.

What's the book building process?

After surpassing the fixed pricing methodology, book building has been the standard method by which a company prices an IPO. Before investors can participate in the fixed pricing process, the price is determined. How does book building work? These are the steps involved in book building.

1. First, the issuing bank will hire an investment bank to act as an underwriter. This task involves determining the appropriate price range for the underlying security and then selling it. An underwriter will also be responsible for creating a prospectus that will be sent to institutional investors.

2. The investment bank will then invite investors to submit bids on the shares they are interested in purchasing. These are usually large-scale buyers for fund managers. The individuals will then submit bids for the shares they are interested to purchase by stating the number of shares and how much they are willing pay.

3. The investment bank then evaluates the total demand for the issue based on all of the submitted bids. The underwriter now needs to analyze the information and arrive at the final price. This is known as the security's cut-off price.

4. The underwriter must publish all details about the submitted bids in order to maintain transparency.

5. All bidders who are accepted by the company receive their shares.

Accelerated Book Construction

This type of book building is used when debt financing is not possible. This is, for example, when one company wants to offer to acquire another. A company can use an accelerated bookbuilding strategy to get financing if it is in financial trouble. This tool allows the company to instantly access financing from the equity markets.

There is a difference between standard and accelerated bookbuilding. In the former, the offer period is only open for a day or two, with very little marketing. This means that the time period between the pricing of an IPO and the issuance of shares is only 48 hours. Sometimes, an accelerated book building process can be implemented in less than 48 hours. On the evening before the placement, the issuing company contacts potential underwriters (investment banking banks).

The shares issuer will invite bidders to the auction. The bank with the highest backstop price will receive the underwriting contract. The underwriter will submit the proposal to institutional investors with the agreed price range. The placement of shares with institutional investors takes place almost immediately. Pricing occurs in one to two days.

IPO Pricing Risk

Companies run the risk that their stock price will be too high or low for any type of initial public offer. If shares are too expensive, potential investors might not be interested. A market reaction can be discouraged, leading to further price drops and lowering the value for securities already purchased.