Book Building

Book building is the process by which an underwriter attempts to determine the price to place a securities offering, such as an initial public offering (IPO), based on demand from institutional investors. An underwriter builds a book by accepting orders from fund managers, indicating the number of shares they desire and the price they are willing to pay.

Book building is the process of price discovery that involves generating and recording investor demand for shares during an initial public offering (IPO) or other issuance stages. The issuing company hires an investment bank to act as underwriter. The underwriter determines the price range the security can be sold for, and sends out the draft prospectus to multiple investors. The large-scale buyers and investors bid the number of shares that they are willing and able to buy, given the price range. As initial prices and transaction sizes are provided by investors, the book is created by listing the information provided during the predetermined time period before the book is considered to be closed.

The book is open for a fixed period of time, during which the bidder can revise the price offered. After five days, the book is closed and the aggregated demand for the issue can be evaluated so that a value is placed on the security. Once closed, the underwriter analyzes the information to determine the initial selling price, also known as the issue price, for the particular offering. The final price chosen in simply the weighted average of all the bids that have been received by the investment banker.

Even if the information collected during the book building suggests a particular price point 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.

An accelerated bookbuild is often used when a company is in immediate need of financing, in which case, 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 to its high debt obligations, it can use an accelerated bookbuild to obtain quick financing from the equity market.

With an accelerated bookbuild, 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 block 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 back stop price. The underwriter submits the proposal with the price range to institutional investors. In effect, placement with investors happens overnight with the security pricing occurring most often within 24 to 48 hours.

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