ShmoopTube

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principles of finance a la shmoop. the key players: bankers underwriters, The

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Syndicate. an IPO is like an elaborate 17th century dance [renaissance festival shown]

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there are many roles and everyone has to play their part or that stately minuet

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starts to look like a mosh pit. so let's take a look at those roles using

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the sauce company as an example. investment bankers advise companies on

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the best way to raise capital, the proposed selling price, how much to sell

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and similar useful information, like you know which tie goes with which shirt. [man holds up shirts]

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well this is the Midwife who actually brings the offering to life. usually

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played by the investment banker but that's not always the case. White shoe

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believes that the investment banking firm silver slacks, could likely sell all

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of the shares on their own. this bank knows everyone but handing all the [celebrity faces shown]

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Commission's for the IPO to one bank is likely bad long-term risk for management.

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like what happens if the management of that bank leaves and starts their own

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hedge fund or something. So that's not what the client Mr. Wu wants he wants a

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few sellers of stock for the IPO involved so that each bank can check on

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each other and so that areas of influence are shared . it's like getting a [chart of banks shown]

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few opinions on brain cancer --it's just a good practice for something that's such

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a big deal as an IPO if this were all about buying a new printer five minutes

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on CNET wouldn't want likely do the trick. [printer ad shown]

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except in Chicago where it was headed by Al Capone, the syndicate is a group of

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underwriters like a group of investment banks with a bunch of sales people who

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handle issues that are too large for any one underwriter to manage- which is

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pretty much all issues these days. there will be one or more lead underwriters [flow chart]

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who assemble the syndicate like they call their buddies at Merrill Lynch and

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JP Morgan and Morgan Stanley and the others, with lower levels of syndicate

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members who actually sell some portion of the issue like a small powerful

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underwriter in the Midwest, or a powerful underwriter in Texas who knows everybody

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in the oil business. well if you're a lead underwriter life

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is good because you get to parcel out the securities to the other members. More

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bragging rights more power more money. well the other syndicate members will

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also be invest banks and/or broker-dealers but usually

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smaller ones. much of their existence is spent sucking up to the big boys at the

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crumbs of the bigger offerings. well syndicate members are selected

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based on some competitive advantage that would enhance the overall sale of the

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IPO maybe an issue is tech related and some syndicate members have really close

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connections with hedge funds or other mutual funds that specialize in [picture of computer tech]

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investing in technology. others have ties with a geographic region .still others

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appeal more to retail investors than institutions and so on. like they know

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everyone who was a cardiologist who went to Bernie's Bar Mitzvah. well the

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syndicate is formed with a syndicate letter that spells out the details. there [documents]

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are two deal platforms under which syndicates form. they are either

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negotiated or competitive. in a negotiated deal the underwriter

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negotiates directly with the issuer. the company selling securities and

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everything is spelled out --that is like goldman sachs might negotiate with the [white board illustration]

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sauce company on pretty much every deal term that's there. well negotiated is the

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most common platform. the other flavor is a competitive bid style of underwriting.

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think eight plumbers bidding to do the job on the new smith house being built

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down the street. competitive bids are the world of muni bonds they're not usually

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done for equities or complex technology companies where it's a lot more

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relationship. here the process is relatively impersonal because all you're

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buying is pretty safe yield-- most muni bonds pay off. and there's bad [man frowns at camera]

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appearances of favoritism that can well be avoided if there's a competitive bid--

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just like bidding to build the government building, right you got to

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have all those numbers out in the public's eye so I don't think someone's

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getting a briefcase full of cash under the table .well as for the personal part [case of cash passed between 2 men]

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of the relationship equation, in that banker selection it's removed you don't

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need it in a muni bond competitive bid some states even require this structure.

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LBW low bid wins simple clean honest .the selling members so if this is a huge

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issuing like the company selling a lot of stock like Facebook did when it went

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public-- like tens of billions the syndicate members may recruit even

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smaller firms to assist in the sales process the main difference between a [flow chart]

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selling number and a syndicate number is that the selling members don't take any

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financial risk. they assist in the sales effort and get a

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commission for it well once the players are identified and everyone knows their

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roles the next step is to figure out who gets what financially speaking. well this

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is found in The Syndicate agreement in addition of financial arrangements. this

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agreement also lays out each member's commitment in terms of shares sold that

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is the underwriting can be set up as either an Eastern or a Western account. [flow chart]

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Eastern accounts stipulate that each member is responsible for selling not

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only its original allocation but also a portion of any unsold allocation from

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other less aggressive or less successful members. that is if a member is

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responsible for 10% of an issue then it's also responsible for 10% of any

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unsold shares. it really forces a teamwork here on everyone because [pie chart]

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everyone dies if they don't place the issue. Western accounts require members

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to be responsible for selling only their own allocation. they can pick up any

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shortfall on their own but they're not required to go pick up a matching amount

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from there would be partners. so when the sauce company sells its stock does it [2 men at a booth]

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sell directly to the public ? no the stock is actually sold by the underwriter the

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underwriter will pay the sauce company stockholders a price and then it'll

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markup that price and resell the stock to the investing public--

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you know presumably at a higher price right ? they mark it up. well the

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difference between what the underwriter pays and what it receives is the spread, [numbers illustrated]

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which is the underwriters gross profit. but remember that the syndicate isn't

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working for free. their compensation also comes from the spread. so the spread is

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divided into the lead managers fee and then the take down. well the take down is

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the profit that each syndicate member makes, not something that happens in the

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octagon. it's usually easier to calculate the take down on a per share basis so if [white board illustration]

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the spread is $1 a share in silver slacks negotiates a fee of 15 cents then

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the take down is the difference between a buck and 15 cents or 85 cents. if there

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are selling members well they have to be paid as well but since they unlike the

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syndicate aren't buying and reselling the shares well, selling members are not

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taking any risk and shouldn't be paid the same. their compensation comes from [chart shown]

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the take down portion which is divided into the two components the concession

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what the selling members receive and you I'll take down what's left for the

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syndicate you can see how everything's divided up here in this handy-dandy

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little chart. anyway those are the key players now you should be able to pick

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them all out of a lineup ,which, depending on how epically they've conducted their [lineup shown]

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business, well you only have to do that someday.

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