Definition
Book building is a systematic process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO) or other securities sales. The process helps in determining the price at which the securities will be offered based on demand. This method provides an accurate reflection of the market’s sentiment towards the stock and the optimal price at which it should be sold.
Key Takeaways
- Book Building is an effective process utilized in marketing a public offer. It allows a company to assess the demand for its securities during an Initial Public Offering (IPO) or follow on public offering (FPO). This provides valuable insights for deciding the final price of the securities.
- It involves the collection of bids from investors, which can range from institutional to retail. The investors indicate the number of shares they desire to buy and the price they are willing to pay. This process assists in determining the price range at which the securities may be sold.
- Book Building is instrumental in mitigating risks and achieving a successful public offer. It allows for better price discovery and ensures the securities are not under or overpriced. It results in a win-win situation for both the issuing company and investors.
Importance
Book building is an important finance term as it is a systematic process used by underwriters to generate, capture, and record investor demand for shares during an Initial Public Offering (IPO) or secondary issuance. It enables the underwriters to assess and price securities based on the investors’ expressed interest.
The final price of the securities is determined after the bid closure based on the demand and bids received. Hence, book building offers a more transparent and efficient method to price securities, minimizing risks for the company raising funds, and ensuring fair pricing to investors.
This promotes confidence and creates a harmonious environment in the securities market.
Explanation
Book Building is fundamentally a common process used by companies raising capital through a public offering. The primary purpose of this process is to aid price discovery.
It is a mechanism where, during the period of bidding, an investment banker who is handling the IPO, builds an electronic book, which records the demand for the shares and the price at which investors are willing to pay for the securities. The key advantage of the book-building mechanism is that it helps generate a more accurate price range for a firm’s securities.
It lends transparency to the process of pricing securities, in comparison to a process dependent purely on the company and investment banker. Moreover, the process offers an opportunity for a wider spectrum of participation in the investment process.
Every investor, big or small, is given an equal opportunity to participate in the bidding process through online platforms, thereby democratizing the process.
Examples of Book Building
Facebook’s Initial Public Offering (IPO): Facebook, in its highly anticipated IPO in 2012, used a book building approach to determine the offer price of its shares. A range of $28 to $35 was initially set and later increased to $34 to $38 due to strong demand.
Google’s IPO: Although Google took a more non-traditional route with a “Dutch auction” style, the company first used book building to gauge the interest and price investors were willing to offer for its shares.
Alibaba Group’s IPO: In its 2014 IPO, Alibaba Group also used the book building method to set the price range of its shares. The company obtained bids from institutional investors and used these indications of interest to settle on the final IPO price.
FAQs about Book Building
What is Book Building?
Book Building is a systematic process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO), or other securities during their issuance process. It is a common method used by companies to raise capital.
How does the Book Building process work?
The Book Building process begins with the investor’s bidding on shares, stating the number they want and the price they’re willing to pay. This allows the company to gauge the demand for its securities. Once this process is completed, the company sets the final price, often based on the bid price that will enable it to sell all the shares offered. This price is used to allocate shares to the bidders.
What is the primary advantage of Book Building?
The primary advantage of Book Building is that it helps to discover the price for securities based on demand from institutional investors. The process increases the success rate of the IPO by creating a hype in the market before shares are actually issued.
What is the difference between ‘fixed pricing’ and ‘book building’?
In fixed pricing method, the company together with managers decide the price at which the securities will be offered to the public. In book building, the price of the security is discovered through the process of collecting bids from interested investors, which vary in quantity and price.
Can retail investors participate in the Book Building process?
Yes, retail investors can participate in the Book Building process. They can bid for shares and potentially receive an allocation, depending on the final price and the total demand for shares.
Related Entrepreneurship Terms
- Underwriter
- Initial Public Offering (IPO)
- Red Herring Prospectus
- Securities and Exchange Board of India (SEBI)
- Price band
Sources for More Information
- Investopedia: A prominent resource for a variety of financial terms and concepts such as Book Building.
- CNBC: A reliable source for finance and business news where you can find articles and insights on Book Building.
- Corporate Finance Institute: An educational platform that offers information and courses about finance-related topics, including Book Building.
- Economic Times: A comprehensive news website with an extensive glossary of economic and financial terms including Book Building.
