Bought Deal (IPO) - Explained
What is a Bought Deal?
Written by Jason Gordon
Updated at July 11th, 2021
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Table of Contents
What is a Bought Deal?How does a Bought Deal Work?A Bought Deal and Other Forms of Initial Public OfferingsAcademic Research on Bought DealsWhat is a Bought Deal?
A bought deal is a type of deal in which an underwriter, an investment bank or a syndicate commits to purchasing the entire stock of a company in an initial public offering (IPO), even before the preliminary. In a bought deal, the investment bank or underwriter gives an assurance of buying the entire offering from the issuing company before a preliminary prospectus is filed. A bought-deal also gives an assurance to the issuer that the amount intended to be generated through an IPO will be realized.
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How does a Bought Deal Work?
A bought-deal suggest that an investment bank is willing to take all the risk of the securities being issued by a company by committing to buy the securities before the preliminary. While this type of deal offers a guarantee to the issuing company that it will reach its target of fundraising through the issuance of the securities, an investment bank must find means to sell the acquired securities if profit must be made. The investment bank takes all the risks of the securities in the sense that the securities might lose value and be sold at a lower price. Another risk that an investment bank might incur is the risk of poor sales. In order to hedge the risk, the bank might request a discount from the issuing company or collaborate with other investment banks to purchase the securities.
A Bought Deal and Other Forms of Initial Public Offerings
A bought deal is associated with an initial public offering, it is when an underwriter such as an investment bank commits to buy the securities of an issuing company even before the preliminary. The major types of IPOs are fixed price IPO and book building IPO. An underwriter is needed for any of these IPOs to facilitate the process. A fixed price offer is one in which the price of the shares of the issuing company is predetermined by the company. The investors are aware of the selling price of the shares even before the company goes public. In a book building IPO, on the other hand, an underwriter determines the price of the securities to be issued. The price is set based on the demand for the shares by investors Regardless of the type of IPO a company wants to execute, an underwriter such as an investment bank is needed to perform the following duties;
- Create an IPO team which comprises experts, the regulatory body such as the Securities and Exchange Commission (SEC) in the U.S, lawyers, public accountants and underwriters.
- Make information about the issuing company available to the investors and other participants.
- Compile the financial information of the issuing company and submit for audit.
- Make projections of the future operations of the company.
Academic Research on Bought Deals
- Financialderegulation, monetary policy, and centralbanking, Goodfriend, M., & King, R. G. (1988). Financial deregulation, monetary policy, and central banking.Federal Reserve Bank of Richmond Working Paper, (88-1). Financial deregulation is widely understood to have important economic benefits for microeconomic reasons. Since Adam Smith, economists have provided arguments and evidence that unfettered private markets yield outcomes that are superior to public sector alternatives. But financial regulations - specific rules and overall structures - are sometimes justified on macroeconomic grounds. This paper analyzes the need for financial regulations in the implementation of central bank policy. Dividing the actions of the Federal Reserve into monetary and banking policy, we find that financial regulations cannot readily be rationalized on the basis of macroeconomic benefits.
- Islamicbanksand investmentfinancing, Aggarwal, R. K., & Yousef, T. (1996). Islamic banks and investment financing.Available at SSRN 845. We study the set of instruments used by Islamic banks to finance projects in Muslim countries given that Islamic Law prohibits the charging of interest. Our evidence indicates that the bulk of the financing operations of Islamic banks do not conform to the principle of profit-and-loss sharing (e.g., equity contracts). Instead, most of the financing is based on the markup principle, and is very debt-like in nature. The majority of financial transactions are directed away from agriculture and industry and long-term financing is rarely offered to entrepreneurs seeking funds. We construct a model which provides insight into these stylized facts. The main implications of our analysis are that economies characterized by adverse selection and mora hazard will be biased towards debt financing. As these problems become more severe, debt will become the dominant instrument of finance. Thus, the use of debt-like instruments is a rational response on the part of Islamic banks to informational asymmetries in the environments in which they operate. We are able to explain the patterns and composition of financing that have emerged in Muslim countries in which Islamic banks operate.
- How todealwith sovereign default in Europe: Create the European Monetary Fund now!, Gros, D., & Mayer, T. (2010). How to deal with sovereign default in Europe: Create the European Monetary Fund now!.CEPS Policy Brief, (202). Despite cobbling together an impressive $1 trillion rescue package for countries with potential funding problems, the threat of a disorderly default still looms over the eurozone, creating systemic financial instability at the EU and possibly global level. Against this background, Daniel Gros and Thomas Mayer renew their call for the creation of a European Monetary Fund (EMF) in an update to their Policy Brief issued in February.
- The early experience with branchlessbanking, Ivatury, G., & Mas, I. (2008). The early experience with branchless banking.CGAP Focus Note, (46). Branchless banking has great potential to extend the distribution of financial services to poor people who are not reached by traditional bank branch networks; it lowers the cost of delivery, including costs both to banks of building and maintaining a delivery channel and to customers of accessing services (e.g., travel or queuing times).
- What keeps the e-bankingcustomer loyal? A multigroup analysis of the moderating role of consumer characteristics on e-loyalty in thefinancialservice industry., Floh, A., & Treiblmaier, H. (2006). What keeps the e-banking customer loyal? A multigroup analysis of the moderating role of consumer characteristics on e-loyalty in the financial service industry.A Multigroup Analysis of the Moderating Role of Consumer Characteristics on E-Loyalty in the Financial Service Industry.(March 26, 2006). At first sight the Internet is the ideal medium for carrying out banking activities due to its cost savings potential and speed of information transmission. From a technological and cost-driven standpoint it may seem quite logical for banks to shift as many banking activities online as possible. At the same time, the question of how to foster customer loyalty arises when the relationship between the bank and the user becomes a virtual one.