What is ‘Lead Underwriter’
A investment bank or other financial outfit that has the primary directive for organizing an initial public stock offering, or a secondary offering for companies that are already publicly traded. The lead underwriter will usually work with other investment banks to establish a syndicate, and thereby create the initial sales force for the shares. These shares will then be sold to institutional and retail clients.
The lead underwriter will assess the company financials and current market conditions to arrive at the initial value and quantity of shares to be sold. These shares carry a hefty sales commission (as much as 6-8%) for the underwriting syndicate, with the majority of shares being held by the lead underwriter.
Explaining ‘Lead Underwriter’
Being the lead underwriter for a stock offering, especially an initial public offering (IPO), can bring a large payday if the market shows high demand for the shares. Often the stock issuer will allow the lead underwriter to create an over-allotment of shares if demand is high, which can bring in even more money to the underwriting firm. There are substantial risks involved in underwriting stock offerings – any one company could plummet in the open market once public trading begins. This is why the large investment banks, such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers and others will look to conduct many diverse offerings in the course of a year.
One or two great stock offerings a year can be enough to meet company earnings targets, but market conditions as a whole will determine the relative amount of profit the investment banks can earn. In the zooming market phase of the late-1990s, investment banks were making money hand over fist as eager investors gobbled up any new shares that came to market, and traded them much higher once on the exchange. However, when the market collapsed in late-2000, the underwriting community went into hibernation mode, advising even the best private companies to “wait out the storm” before going public.
Further Reading
- Why do firms switch underwriters? – www.sciencedirect.com [PDF]
- Reputation and financial intermediation: An empirical investigation of the impact of IPO mispricing on underwriter market value – www.sciencedirect.com [PDF]
- Why are IPO investors net buyers through lead underwriters? – www.sciencedirect.com [PDF]
- Getting off to a good start: The effects of upper echelon affiliations on underwriter prestige – pubsonline.informs.org [PDF]
- Underwriting relationships, analysts' earnings forecasts and investment recommendations – www.sciencedirect.com [PDF]
- The economics of conflicts of interest in financial institutions – www.sciencedirect.com [PDF]
- Share issue privatizations as financial means to political and economic ends – www.sciencedirect.com [PDF]
- The lead underwriter reputation and underpricing: study of company's IPO in Indonesia – www.inderscienceonline.com [PDF]
- The matching of lead underwriters and issuing firms in the Japanese corporate bond market – www.sciencedirect.com [PDF]
- Are there economies of scale in underwriting fees? Evidence of rising external financing costs – academic.oup.com [PDF]
