Book building
Encyclopedia
Book building refers to the process of generating, capturing, and recording investor demand for shares during an IPO (or other securities during their issuance process) in order to support efficient price discovery
. Usually, the issuer
appoints a major investment bank to act as a major securities underwriter or bookrunner
. The “book” is the off-market collation of investor demand by the bookrunner
and is confidential to the bookrunner, issuer, and underwriter. Where shares are acquired, or transferred via a bookbuild, the transfer occurs off-market, and the transfer is not guaranteed by an exchange’s clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.
Book building is a common practice in developed countries and has recently been making inroads into emerging markets
as well. Bids may be submitted on-line, but the book is maintained off-market by the bookrunner and bids are confidential to the bookrunner. The price at which new shares are issued is determined after the book is closed at the discretion of the bookrunner in consultation with the issuer. Generally, bidding is by invitation only to clients of the bookrunner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and bookrunner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All bookbuilding is conducted ‘off-market’ and most stock exchanges have rules that require that on-market trading be halted during the bookbuilding process.
The key differences between acquiring shares via a bookbuild (conducted off-market) and trading (conducted on-market) are: 1) bids into the book are confidential vs transparent bid and ask prices on a stock exchange; 2) bidding is by invitation only (only clients of the bookrunner and any co-managers may bid); 3) the bookrunner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion; 4) all shares are issued or transferred at the same price whereas on-market acquisitions provide for a multiple trading prices.
If demand is high enough, the book can be oversubscribed. In these case the greenshoe option is triggered.
Book building is essentially a process used by companies raising capital through public offerings—both initial public offers (IPOs) or follow-on public offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.
Price discovery
The price discovery process is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers ....
. Usually, the issuer
Issuer
Issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations.Issuers may be domestic or foreign governments, corporations or investment trusts...
appoints a major investment bank to act as a major securities underwriter or bookrunner
Bookrunner
In investment banking, a bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in equity, debt, or hybrid securities issuances. The bookrunner usually syndicates with other investment banks in order to lower its risk. The bookrunner is listed first among all underwriters...
. The “book” is the off-market collation of investor demand by the bookrunner
Bookrunner
In investment banking, a bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in equity, debt, or hybrid securities issuances. The bookrunner usually syndicates with other investment banks in order to lower its risk. The bookrunner is listed first among all underwriters...
and is confidential to the bookrunner, issuer, and underwriter. Where shares are acquired, or transferred via a bookbuild, the transfer occurs off-market, and the transfer is not guaranteed by an exchange’s clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.
Book building is a common practice in developed countries and has recently been making inroads into emerging markets
Emerging markets
Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. Based on data from 2006, there are around 28 emerging markets in the world . The economies of China and India are considered to be the largest...
as well. Bids may be submitted on-line, but the book is maintained off-market by the bookrunner and bids are confidential to the bookrunner. The price at which new shares are issued is determined after the book is closed at the discretion of the bookrunner in consultation with the issuer. Generally, bidding is by invitation only to clients of the bookrunner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and bookrunner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All bookbuilding is conducted ‘off-market’ and most stock exchanges have rules that require that on-market trading be halted during the bookbuilding process.
The key differences between acquiring shares via a bookbuild (conducted off-market) and trading (conducted on-market) are: 1) bids into the book are confidential vs transparent bid and ask prices on a stock exchange; 2) bidding is by invitation only (only clients of the bookrunner and any co-managers may bid); 3) the bookrunner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion; 4) all shares are issued or transferred at the same price whereas on-market acquisitions provide for a multiple trading prices.
Process
During the fixed period of time for which the subscription is open, the bookrunner collects bids from investors at various prices, between the floor price and the cap price. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the book runner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price.If demand is high enough, the book can be oversubscribed. In these case the greenshoe option is triggered.
Book building is essentially a process used by companies raising capital through public offerings—both initial public offers (IPOs) or follow-on public offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.
External links
- About Accelerated Bookbuilds
- About Accelerated Bookbuilds
- About Accounting for Bookbuilds
- About ASX disclosure requirements for bookbuilds
- A definition from The Handbook of International Finance Terms at p54 attachment 18 adopted by ASX
- A ASX announcement from Woodside Petroleum regarding a bookbuild outcome
- About Book Building
- Understanding IPO jargon