What Is a Book Building?

What Is a Book Building?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Book building is a process used by companies to raise capital. This is done by offering shares to the public before they are actually listed on a stock exchange. The process starts with a company appointing a lead manager, often an investment bank or financial institution. This manager then builds an order book, which is a record of investors who are willing to buy the shares and the price they are ready to pay for them.

During the book building process, the price range at which shares are offered is outlined. Investors can then bid for shares within this price range. Based on the investor’s response, the lead manager determines the price at which the shares will be issued. This market-driven method allows the issuing company to discover the price investors are willing to pay for its shares.

Related Questions

1. What is the role of a lead manager in book building?

The lead manager, usually an investment bank or financial institution, designs and manages the book building process. They serve as the primary liaisons between the company seeking to issue shares and the potential investors. Their responsibilities include setting a price range, accepting bids from investors, and finalizing the price at which the shares will be issued.

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2. How is the final share price determined in book building?

The final price of the share in book building is determined by the lead manager, taking into account the demand from investors and the price they are willing to pay. The aim is to identify a price that will raise the maximum amount of capital for the company while ensuring fair value for the investors.

3. Is book building only for new share issues?

No, book building can be used for both new share issuances, known as Initial Public Offerings (IPOs), and secondary offerings from companies that are already publicly listed. The process helps these companies acquire the necessary capital from public investors.

4. What is the difference between book building and a public offer?

While both are methods of selling shares to the public, book building and public offering differ significantly. In a public offering, the price is known in advance, while in book building, the price is determined by investor demand. Moreover, a public offer is first-come, first-serve, whereas in book building, allocation of shares depends on bid value rather than the order in which the bid was made.

5. What is the risk associated with book building?

The primary risk associated with book building is that there may not be enough demand from investors at the price range set, leaving the shares undersubscribed. This can result in lower capital raised than anticipated by the issuing company. Also, if shares are priced too high, they may not perform well once listed on the stock exchange.