Setting prices is part of the Book Building process. The book building process is for investment bankers. It helps in finding out how many people are interested. This is useful for a company's first or secondary public issuance of common shares or other securities. During book building, the investment bank will ask its customer base. It involves institutional and large investors with money. Because of these early offers, bankers and the management team of the company can get a sneak peek at how much the market wants the shares.

A corporation will retain the services of an advisor when it is considering going public. Additionally, it helps the company navigate the drawn-out and expensive process of going public. The investment bank makes a binding agreement with the issuer to buy all the shares. The bank then sells the shares back to the market. Building up the company's book of business gives the company more confidence that the offering will succeed. The advantages of the Book Building process make it more important.

Types of Book Building

There are two other types of book building outside the regular IPO.

Accelerated Book Building

An accelerated book-building offer is for when a significant block of shares needs to be sold fast.

Reverse Book Building

An issuer can repurchase their shares through the process of reverse book building.

How Book Building Process Works

The stages of book building working:

Hiring Underwriter

The issuing firm must work with an investment bank. Being an underwriter for a company might be helpful. The investment bank specifies the amount of the issue. It establishes the price range of the securities with the help of the management of the firm that is issuing the securities. The corporate prospectus contains all pertinent information about the issuing firm. It is written by a bank that invests money. The price range for the share includes both the floor price and the ceiling price.

Bids Placed by Investors

Investors are welcomed in investment banks. These people have a significant amount of wealth and are fund managers. It is effective for them to submit bids indicating the number of shares they are willing to buy at various prices. There are times when more than one investment bank contributes to underwriting the entire issuance. Instead, the primary investment bank is collaborating with several other investment banks.

Pricing of Shares

The investment bank considers the total bids received before deciding the issuance demand. The underwriter will use the weighted-average approach. It will help to arrive at the final price of the share when they are attempting to price the share of the issue. This last price is referred to as the "cut-off price" in some circles.

Transparency of the Bidding Process

The vast majority of stock exchanges worldwide must disclose to the general public the specifics of the bidding procedure. An underwriter handles making public the information about the bids that investors have filed to buy shares of the issuance.

Allotment & Settlement

At long last, the allotment procedure gets underway. The first step is to distribute the available shares of the offer to the successful bidders. Investors whose bids were higher than the cut-off price have their extra money returned to them. Meanwhile, the investment bank asked investors whose bids were lower than the cut-off price. It then pays the difference between its bid and the cut-off price.

Book Building Alternatives

The majority of initial public offerings include book building as an important step. It is for determining the offering price. There are two more possibilities available.

Auction

The price is established through competitive public bidding. Instead of holding roadshows and soliciting expressions of interest, the company gives all potential investors a chance. The chance is to place bids on shares before the initial public offering (IPO).

Direct Listing

Investors are allowed to buy company shares through a process known as a direct listing. When a firm decides to list its shares on an exchange, the market determines the starting price of each share based on the supply and demand for those shares. There is no participation from underwriters during the sales process.

Advantages and Disadvantages of Book Building

Advantages of Book Building

• The roadshow and indications of interest give the issuer a transparent picture of the pricing structure. Additionally, the demand for stocks from expert and seasoned investors who have significant quantities of cash to invest.
• Additionally, investment banks often specialize in a particular industry. It helps in offering issuers the experience and credibility they need to attract investors from their respective networks.
• The process of "building the book" makes it less likely that there won't be enough subscribers. If there are not a sufficient number of individuals who are interested in the offer, the bank will be responsible for any shares that aren't sold at the listing price.

The Disadvantages of Book Building include:

• The cost incurred by the issuer is lower. Because the shares are sold to the investors, no broker costs are associated with the transaction.
• The biggest drawback that the issuer faces is that there is a possibility that the security will be underpriced. The definition of underpricing was the discrepancy. It's somewhere between the current share price and the opening price. Investors find pre-IPO shares appealing for a number of reasons, one of which is that the pricing of such shares are discounted.

To Wrap Up

Book building is one of the ways that make the best use of both time and energy. Companies decide the price of their shares during initial public offerings with the assistance of investment bankers. In addition to this, it provides assistance to investors in the process of valuing the shares. It is helpful because it enables them to submit bids to the underwriter, which is something that is not feasible if the company prices its shares using a fixed-price mechanism.