How a Book-Building Works in Securities Trading

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The book-building method describes a procedure for placement of securities in which interested investors can offer to purchase within a specified subscription period and price range.

The bids are collected during the subscription period in the order book. At the end of the subscription period, usually the issuing company reaches decisions together with the underwriters, on which investors are successful. Not only the amount of bids is crucial, but also the nature of the investor as well as a possible historical relationship.

The book-building is thus clearly distinguished from both the fixed price method, which attempts to sell securities at a price fixed in advance, and the auction process.

The Anglo-Saxon method (also classic book building) is a process which entails the establishment of a price range and the maximum number prior to emitting shares. More precisely, it enables the determining of a fair market offer price of shares which allows, in contrast to the fixed price method, a dynamic pricing.

Bookbuilding involves several steps:

In the pre-marketing phase, the price range will be matched with that of prominent investors. On the initial public offering, an aspiring company seeks out banks interested in carrying the issue.

These banks explore the interest of potential investors in the new shares. Based on their suggested retail prices, the price range will be set and made public in the marketing phase. Presentations of the company to the international financial markets (road shows) are used to attract other potential investors.

This is followed by the actual book building (taking orders): Institutional and private investors specify limits within a specified period, through their purchase orders. These purchase contracts include a price (which falls within the applicable margin) and the desired number of shares that investors want to buy at that price.

All bids below this price will be excluded from the share allocation. Investors who have paid a higher price than the final offer price, buy at the offering price. If the maximum number of shares being issued exceed this volume, then the actual allocation determined by the underwriting syndicate or the number of shares issued will increase.

In the accelerated and decoupled method, accelerated book-building is the first route taken with the aim of enabling more precise price evaluation by potential investors. After this, the closest price range is given to potential investors, while the supply time is also limited to a lower time, such as a few days.

Decoupled bookbuilding is contrary to the traditional marketing process based on the IPO price range at which the shares are issued, and not disclosed prior or during the road show, but only shortly before the opening of the order book. Accordingly, the price range of the securities will be added later.

 

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