| Passage 1 New securities by companies are usually brought to market after advice and a commitment to underwrite by an investment banking firm. Underwriting simply means that the investment banker promises to buy the securities. The investment bank helps design the security and the investment banker buys it from the issuer with the intent of selling it to investors as quickly as possible. Usually, the issue is not subscribed to in its entirety by the original investment banker but is syndicated among other institutions as well. Through the syndication process, the original investment banker invites others to subscribe to a part of the issue, receiving a predetermined portion of the fees in return. The original investment banker becomes known as the lead manager of the deal. ff there is more than one lead, the group is referred to as co-lead managers. The firm that deals directly with the company will be responsible for any syndication formation and also for final payment on behalf of the syndicate. It is referred to as the book runner for the issue. New issues of common stock come into two varieties-primary distributions and secondary distributions. Primaries are sales of stock that have never been issued before. There are two types of primary distributions-initial public offerings (IPOs) and additional floats of companies' stock that will dilute each shareholder's existing holding. Of the two, the latter are more common in the new issues market for equities since they involve offerings of shares of larger, more mature companies seeking additional equity capital. Secondary distributions are sales of stock that previously existed in some form or other but are too large to be accommodated on the stock exchanges. Procedures for secondaries often follow those for primaries although the offering period is much shorter and may involve a matter of hours rather than days. The actual marketing for these issues is done by investment bankers directly to the public. On rare occasions, companies have attempted to sell their shares or bonds directly to the public, avoiding investment banking fees. Unless the company is very well known, such attempts are less than successful. The behavior of investment bankers is key to the reception of new issues and directly affects the cost of capital for a company. As a result, the choice of an investment banker is crucial for a company, and the wrong choice could affect its costs over the near tenrm. This is true for bonds as well as for common stocks. |