Lead Underwriter

A lead underwriter is an investment bank or other financial outfit that has the primary directive for organizing an initial public stock offering, or a secondary offering for companies that are already publicly traded.

The lead underwriter will usually work with other investment banks to establish an underwriter syndicate, and thereby create the initial sales force for the shares. These shares will then be sold to institutional and retail clients. The lead underwriter will assess the company financials and current market conditions to arrive at the initial value and quantity of shares to be sold. These shares carry a hefty sales commission (as much as 6 to 8 percent) for the underwriter syndicate, with the majority of shares being held by the lead underwriter.

Being the lead underwriter for a stock offering, especially an initial public offering (IPO), can bring a large payday if the market shows high demand for the shares. Often, the stock issuer will allow the lead underwriter to create an over-allotment of shares if demand is high, called a greenshoe option, which can bring in even more money to the underwriting firm. There are substantial risks involved in underwriting stock offerings – any one company could plummet in the open market once public trading begins. This is why the large investment banks, such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers and others will look to conduct many diverse offerings in the course of a year.

One or two great stock offerings a year can be enough to meet company earnings targets, but market conditions as a whole will determine the relative amount of profit the investment banks can earn. In the zooming market phase of the late-1990s, investment banks were making money hand over fist as eager investors gobbled up any new shares that came to market, and traded them much higher once on the exchange. However, when the market collapsed in late-2000, the underwriting community went into hibernation mode, advising even the best private companies to "wait out the storm" before going public.

Determining the final offering price is one of the biggest responsibilities of an underwriter. First, the price determines the size of the proceeds to the issuer. Second, it determines how easily the underwriter can sell the securities to buyers. Usually, the issuer and lead underwriter work closely together to determine the price. Once they agree on a price for the securities, and the SEC has made the registration statement effective, the underwriters call the subscribers to confirm their orders. If the demand is particularly high, the underwriters and issuer might raise the price and reconfirm the sale with subscribers.