May 27, 2022

Lakeway Parks

The Smart Business

The difference between book-building

The difference between book-building issue and fixed-price issue

Book-building is a new way of issuing securities on the stock market where investors bid for securities at what price they are willing to pay. A book-building agreement will be made between the issuer and the lead managers or book-runners who will manage the sale of new shares in a company, giving them the privilege to offer these shares at their discretion over a certain period.

The fixed price issue is another way of selling securities on the market. Shareholders also bid for new shares in the company, with the issuer having set a minimum price they are willing to accept.

Method of issuing

A book-building issue is a process of trying to establish which price or range of prices will be acceptable to potential investors for a given new issue. This part of the book-building process may involve interaction with investors (particularly institutional investors) involving presentations and telephone calls, including clients’ queries about the new issue, feedback from meetings; estimation of demand; and consultation with bid assessment committees. The issuer firm then proposes a price range within which underwriting syndicate members can sell shares at their discretion.

A fixed-price offer is where an issuer offers securities at a price listed in the prospectus before launch. There are no negotiations involved after that first listing. However, if it’s oversubscribed, the company can sell at a higher price after checking with investors to see if they’d like more.

The minimum price for new shares issued

In a book-building issue, companies set out a minimum price that they will accept, and the lead managers try to arrive at a reasonable share price within this spread which they hope will maximise demand and revenue. There is no such discussion in fixed-price offers as the offer is already decided before it goes public. The firm sets its initial price and then negotiates with shareholders on each shareholder’s purchase.

The book-building process usually involves the issuer and lead managers in a dialogue to obtain price indications from potential investors and determine an appropriate course of action in selling equity. However, there is no discussion in the fixed-price process as it’s already decided before it goes public. They set their initial price and negotiate with shareholders on how much they can purchase.

Minimum number of shares sold

In a book-building issue, companies set out a minimum amount of shares they are willing to sell; the lead manager sets out an appropriate price range that they hope will maximise demand and revenue for its new issuance. In fixed price offers, the issuer sets out a minimum amount of new shares they are willing to sell and negotiates with shareholders on how much each shareholder can purchase.

As mentioned earlier, there’s a minimum number of shares in the book-building process that issuers will indicate they’re willing to sell. However, there isn’t such a limit set by the company in fixed-price offers.

Lead managers or book runners

The book-building issue involves negotiations between the issuer and book runners for a final share pricing. Book runners should have financial expertise and create demand from institutional investors before selling them at a reasonable price, maximising revenue for the firm issuing securities. The lead managers recommend a share price based on investor demand and earnings to get that price as close to the opening price as possible.

In a fixed-price offer, lead managers or book runners are not involved because it is set at the beginning and doesn’t need negotiations for a final share pricing between issuer and book runners.

Final pricing approval

The final share price in a book building issue is based on discussions with investors and other market elements like supply and demand. Nevertheless, directors must have official approval before the issuer can determine their final asking price. However, there is no need for directors’ approval in the fixed-price offer because it’s already been decided before going public.

The final share price is based on negotiations between the issuer and book runners in a book-building process.