Book Building
Book-building is the process by which underwriters set the price of a share issue: they announce a price range, collect indications from institutional investors of how many shares they would buy at what price, and from that book of orders choose the final price and allocate the shares. It replaced fixed-price offers because it prices from demand rather than from the banks' guess, and it is where an IPO's "money left on the table" is decided.
- Also known as
- Bookbuilding, Building the book, Order book
- Used at
- IPOs and large secondary offerings; a version of it — an accelerated bookbuild — sells a block of shares overnight
- Binding
- investor orders are indications until allocation; the price, once set, is the underwriting agreement's price
- Typical timetable
- a price range in the prospectus; one to two weeks of roadshow while the book opens; pricing the evening before listing; allocation that night
- Typical signals
- the book's coverage (orders ÷ shares offered — two to four times is healthy), the price sensitivity of the orders (how much demand falls at the top of the range), and the quality of the names (long-only funds against hedge funds and flippers)
- Parties
- the bookrunners, the issuer (which decides the price on the banks' recommendation), and the institutions whose orders make the book
How book-building works in practice
The bookrunners publish a range — €18 to €22 — and open the book. Over the roadshow, fund managers who have met management and read the research tell the banks their orders: 500,000 shares at any price, 1m shares at up to €20, "10% of the deal" at €19. The banks record and grade them: a long-only fund that will hold is worth more than a hedge fund that will sell on day one, and an order at "any price" more than one with a limit. The book grows and, if the deal is working, the banks tighten the range or the message — "the book is covered at the top of the range" — to draw the last orders in.
On the evening before listing the bookrunners and the issuer choose the price. Higher raises more money; lower leaves the book more oversubscribed, so the shares are allocated to the best investors, trade up on day one, and the issuer's later offerings are welcomed. Then allocation: the banks decide who gets what, favouring the investors they want on the register, and scaling back the rest. Investors know this and inflate orders, which the banks know and discount.
For a fintech IPO the book is also a verdict on the story: a book that is covered only by hedge funds at the bottom of the range is telling the issuer something the roadshow did not.
Example
A payments fintech offers 15m shares at €18–22. After nine days the book holds €1.4bn of orders: 60% from long-only funds, three-quarters of it insensitive to price within the range, and a cluster of limits at €20. The bookrunners recommend €20 — four times covered at that price, with the top-of-range demand judged soft. The issuer, tempted by €22, accepts €20: €300m raised instead of €330m, and a first day that closes at €22.40 with the long-only funds holding. The €30m not raised is the price of a register that stays, a greenshoe that is exercised, and a follow-on offering a year later that the same funds fill in a day.
Common mistakes
- Pricing at the top of a range the book only just covers, and opening below the offer price. - Reading inflated orders as demand; the banks discount them, and so should the issuer. - A range set so wide it signals the banks do not know, or so narrow it cannot move. - Allocating to whoever ordered most rather than to who will hold. - Treating a covered book as a successful IPO before the shares have traded for a month.