Methods of Issuing New Securities
15-6
Underwriters
• Underwriters: investment firms that act as intermediaries between the issuer and the public
• Underwriting services: – Formulate method to issue securities
– Price the securities
– Sell the securities
– Price stabilization by lead underwriter in the aftermarket
• Syndicate = group of investment bankers (Underwriters) that market the securities and share the risk associated with selling the issue
• Spread = difference between what the syndicate pays the company (buying price) and what the security sells for in the market (offering price)
If the public issue of securities is a cash offer, underwriters are usually involved. Underwriting is an
important line of business for large investment firms such as Merrill Lynch.
Some of the services provided by underwriters include:
• Help in determining the type of security to issue • Help in determining the method used to issue the securities • Pricing of the securities • Selling the securities • In the case of an IPO, stabilizing the price in the aftermarket
Price stabilization is an important component of the lead underwriter’s job for IPOs.
Underwriters usually combine to form an underwriting group called a syndicate to share the risk and to
help sell the issue, managed by a lead underwriter
Spread—the difference between the underwriter’s buying price and the offering price; it is the
underwriter’s main source of compensation and for IPOs in the range of $20 to $80 million the spread is
typically 7%. For penny stock IPOs, the spread is generally 10%. Spread is also called gross spread.
Sometimes, on smaller deals, the underwriter will get noncash compensation in the form of warrants and
stock in addition to the spread.