What Is an Underwriting Syndicate?

What Is an Underwriting Syndicate?

When a company decides to go public and issue shares through an initial public offering (IPO), it usually hires one or more investment banks to act as underwriters. These banks are responsible for advising the company through the IPO process, setting the price and number of shares, marketing the shares to potential investors, and guaranteeing the sale of the shares in case of insufficient demand. However, in many cases, one investment bank alone cannot handle the entire IPO process, especially if it is a large or complex transaction. Therefore, it is common for several investment banks to work together as a group, known as an underwriting syndicate, to share the risks and rewards of the IPO.

How Underwriting Syndicates Work?

Underwriting syndicates work by bringing together a group of investment banks to share the risks and rewards of an IPO. The lead underwriter, also known as the book runner, manages the overall process, including advising the company, setting the IPO price, and determining the number of shares to issue.

They play a significant role in marketing the company during the IPO and use their relationships with potential investors to identify likely candidates to purchase shares in the IPO. Co-managers provide additional marketing reach, especially targeting institutional investors or regions where the book runners have less influence. They sell a smaller number of shares compared to the book runners. The lead left book runner, the top left most underwriter on the prospectus, earns the highest fees and sells the largest number of shares.

An underwriter syndicate is a temporary alliance of investment banks that join forces to help a company issue its shares through an IPO. The syndicate is formed by a lead underwriter who invites other banks to participate in the deal. The lead underwriter is usually the bank that has the closest relationship with the issuing company and the most experience in the industry sector or market segment of the company. The other syndicate members are typically divided into two categories: co-managers and co-underwriters.

Co-managers have a significant role in the IPO process, such as providing additional advice, marketing, and distribution services to the issuer. Co-underwriters have a limited role, mainly providing access to their network of investors and agreeing to buy a certain number of shares if there is not enough demand from the public. The syndicate members are allocated shares according to their level of involvement and contribution to the IPO. They then sell the shares to their clients, earning fees from the underwriting spread or underwriting discount, which is the difference between the price they pay to the issuer for the shares and the price they charge to their clients.

The Process of an Underwriter Syndicate

The process of forming and operating an underwriter syndicate involves the following steps:

• Selection: the issuer selects the lead underwriter through a competitive bidding process, also known as a bake-off, where different banks pitch their services and qualifications to the issuer
• Creating the Syndicate and Roles: the lead underwriter invites other banks to join the syndicate, based on their expertise, reputation, and relationships with potential investors. The lead underwriter also assigns roles and responsibilities to each syndicate member and determines the allocation of shares and fees.
• Due diligence: the syndicate members conduct due diligence on the issuer and its financial statements, operations, industry, and market. They also help the issuer prepare the prospectus, which is a legal document that discloses all the relevant information about the company and the IPO to the public and the regulators.
• Pricing the IPO: the syndicate members work together to price the IPO, which involves estimating the value of the company and its shares, based on various factors, such as the company’s financial performance, growth prospects, competitive position, industry trends, and market conditions. The pricing also depends on the demand and supply of the shares, which are gauged by the syndicate members through a process called book building, where they solicit indications of interest from potential investors and collect information on their preferred price and quantity of shares.
• Launch: The syndicate members launch the IPO, which involves marketing the shares to the public through various channels, such as roadshows, presentations, advertisements, and media coverage. The syndicate members also facilitate the order placement and execution of the shares through their trading platforms and networks. The IPO is usually open for a period of time, during which the syndicate members receive and confirm orders from their clients.
• Closing – finalizing price and allocation: The syndicate members close the IPO, which involves finalizing the price and number of shares, based on the demand and supply of the shares and the issuer’s objectives. The syndicate members then allocate the shares to their clients, according to their orders and preferences. The syndicate members also transfer the proceeds from the sale of the shares to the issuer, after deducting their fees and expenses.
  • Greenshoe option: The syndicate members may also exercise an option called the greenshoe or over-allotment option, which allows them to buy additional shares from the issuer at the IPO price and sell them to the public, if there is excess demand for the shares. This option helps stabilize the price of the shares in the secondary market and prevent it from falling below the IPO price.
• Dissolve the syndicate post lock-up: the syndicate members dissolve the syndicate, which usually occurs after a period of time, known as the lock-up period, during which the syndicate members and the issuer agree not to sell any more shares of the company to the public. The lock-up period typically lasts for 90 to 180 days after the IPO and is intended to protect the price of the shares from dilution and volatility. After the lock-up period expires, the syndicate members and the issuer are free to sell their shares in the secondary market, subject to the market conditions and the regulatory rules.

Large vs Small Underwriting Syndicates

There are advantages to using a large underwriting syndicate, particularly if the deal is large-scale and likely to attract a lot of investor attention. Conversely, there are also advantages to running a more streamlined and potentially efficient syndicate. Download Large vs Small Underwriting Syndicates for a full breakdown of the advantages and disadvantages of large vs small underwriting syndicates.

Example of an Underwriter Syndicate

In 2019, Uber Technologies Inc, the taxi company, went public through an IPO that raised $8.1 billion by selling 180 million shares at $45 per share. The lead left book runner for Uber’s IPO was Morgan Stanley, which had a 26% share of the underwriting syndicate and sold 46.8 million shares, earning about $170 million in fees.

The other book runners were Goldman Sachs, Bank of America Merrill Lynch, Barclays, Citigroup, and Allen & Company, which had shares ranging from 11% to 15% of the underwriting syndicate and sold between 19.8 million and 27 million shares each, earning between $67 million and $92 million in fees each.

The co-managers were RBC Capital Markets, SunTrust Robinson Humphrey, Deutsche Bank, HSBC, SMBC Nikko, Mizuho Securities, Needham & Company, Loop Capital Markets, Siebert Cisneros Shank & Co., Academy Securities, and Canaccord Genuity, which had shares ranging from 0.5% to 2% of the underwriting syndicate and sold between 0.9 million and 3.6 million shares each, earning between $4 million and $15 million in fees each.

The total underwriting spread for Uber’s IPO was 7%, which was higher than the average of 5.75% for US IPOs in 2019. This reflected the size and risk of Uber’s IPO, which was one of the largest and most anticipated in history. However, Uber’s IPO also faced challenges, such as regulatory uncertainty, profitability concerns, and market volatility, which caused its share price to drop below the IPO price on the first day of trading.

Conclusion

Underwriting syndicates play a pivotal role in the success of an IPO by managing the distribution of shares, providing market expertise, and ensuring the sale of shares. The structure and size of the syndicate can significantly impact both the issuer and the investors, influencing the reach, fees, and overall market reception of the IPO. Companies wishing to IPO should conduct careful due diligence of what each financial institution can offer their deal and consider the pros and cons of working with a wider group.