Roles of Participants in Offerings

Instructor: LEROY (Bill) RANDS

Bill has taught college undergraduate and MBA classes in finance, economics & management, 40 years of finance experience and has a MBA degree.

All companies at some point go to public markets with stocks or bonds to raise capital. This lesson describes the role of the investment bankers, the underwriting syndicate, and muncipal advisors in that process.

Stock and Bond Offerings

Private and government entities at one time or another need to raise additional capital to operate their business. Public entities like the federal government, state governments and county and city governments also raise capital to finance buildings, roads and infrastructure, or when their capital needs exceeds their revenue base from taxes.

So who do these entities go to help them through the process of raising capital? Let's go over the role of key players like investment bankers, underwriting syndicates and municipal advisers in managing that process.

Types of Offering

These key players participate in many types of offerings, including:

  • initial public offerings - the first time a company seeks public funds
  • secondary offerings - when a public company goes back to sell more stocks or bonds
  • private placements - raising capital through designated parties instead of selling to public
  • municipal bonds - government entities selling bonds

The process of raising capital must be successfully managed and implemented so that a private or public entity raises the capital needed at the most efficient cost and price. The investment bankers, underwriting syndicates and municipal advisers are the people who are tasked with making that offering a success.

Role of the Investment Banker

The investment banker is a financial adviser to corporations and governments. They act as an adviser on matters relating to capital markets rather than dealing directly with individual investors. They also assist on merger and acquisition activities of their clients.

The investment banker is the key player in helping the corporation or public entity raise the capital they need. He or she:

  • Performs due diligence to ensure that the company is in a good financial position to do the offering and that it will be a success.
  • Ensures that the proper documents are filed and that Securities and Exchange Commission approval is received.
  • Works with the issuer and its lawyers to prepare the prospectus for marketing the offering.
  • Sets the price of the stock or bond.
  • Establishes a underwriting syndicate if necessary and ensures that the offering goes smoothly.

In offerings, the investment banker (and the underwriting syndicate) assumes underwriting risk, meaning they commit to buying the whole issuance and anything they don't sell will have to go into their own inventory to be sold later. The investment banker's reputation depends on their ability to make the offering attractive and to sell out the offering.

Underwriting Syndicate

Often a bond or stock offering is so large that one investment banker cannot market the whole offering. The lead investment banker contacts other investment bankers to participate in the offering. This group is called an underwriting syndicate. They commit to taking a certain amount of the stocks or bonds that will be issued and use their brokers and customer base to sell their share of the offering.

Like the principal investment banker, underwriting syndicates assume underwriting risk and have to buy their allotment of the offering whether they have commitments from their customers to buy the allotment or not. Unsold shares go into their inventory. Almost all offerings involve an underwriting syndicate.

Municipal Adviser

Government entities sell municipal bonds to raise the money they need beyond the revenue streams from taxes. Government municipal bonds are an unique investment because the interest or coupon rate is tax-exempt, so they are attractive investments for high income investors who want to avoid income taxes.

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