Business, Legal & Accounting Glossary
An offering in which the underwriter (or syndicate) buys all the shares and resells them. When the underwriter’s) are willing to take this risk it is a sign that they have a high degree of confidence in the issue’s success.
A bought deal is a type of financial agreement in which the investment banker in charge of a company’s initial public offering (IPO) agrees to buy the entire IPO for a set amount of money. The financial risk for the company is greatly reduced in this transaction because the amount of money it plans to raise through the IPO is known and would be obtained. However, if the IPO opening price is higher than expected, the company may have to accept a lower price for its shares.
A bought deal is less risky for the company looking to sell its shares in the market for the first time, but it is riskier for the investment banker because they are responsible for selling all of the shares to other investors in the open market. There is always the possibility that the investment bank will not be able to sell all of the shares, or that the value of the shares will fall before they are sold to investors. Furthermore, the investment bank’s capital is trapped in these unsold shares, preventing it from being put to better use.
To mitigate this risk and compensate for potential losses, the investment bank will attempt to negotiate a significant discount when purchasing the shares from the company. Because of the lower risk associated with the offering, the company selling the shares may agree to a discounted price. The investment bank provides it with the funds it requires for its business. For example, if the anticipated offering price of a share is $10, the investment bank may negotiate a $6 or $7 value per share for the purchased deal, depending on the company’s financial capabilities. The remaining few dollars on each share are profit for the investment bank and more than likely compensate for the loss from unsold shares.
In some cases, an investment bank may bring in other banks to form a syndicate to spread the risk. This strategy is only used when the transaction is large enough and comes from reputable companies.
Proprietary Deal
Club Deal
Equity Syndicate
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Bought Deal are sourced/syndicated and enhanced from:
This glossary post was last updated: 26th January, 2022 | 0 Views.