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Book Runners

Definition

Book runners, in financial terms, refer to the main investment banks or firms that manage the issuance and allocation of new security offerings. They play a crucial role in the Initial Public Offering (IPO) process, helping to determine the initial price and demand for the security. Additionally, book runners usually have a close relationship with the issuing company and maintain a list of investors (the book) who show interest in buying the shares.

Phonetic

The phonetic pronunciation of ‘Book Runners’ would be: /bʊk rʌnərz/

Key Takeaways

  1. Role in Underwriting: A book runner, usually an investment bank or a securities firm, plays a significant role in underwriting process of an initial public offering (IPO) or any security issuance. The book runner is responsible for maintaining the book of securities sold.
  2. Responsible for Distribution: They are principally responsible for finding buyers for the issuance, thereby playing a key role in determining the final price of the security because they gauge demand and interest in the market. They essentially manage the distribution and allocation of newly issued securities to investors.
  3. Leader of the Syndicate: If the entire issue is too large or complex for one firm to handle, the book runner may form a syndicate of other securities firms. The book runner is considered the leader of this syndicate, having authority over other firms in the syndicate.

Importance

Book Runners play a significant role in the financial market as they are primarily responsible for managing the initial public offering (IPO) process. As the main underwriter in an IPO, the Book Runner determines the initial price range for a security, influences the final offering price, and usually purchases the most shares of any underwriter involved in the offering. They help to gauge investor interest, which is used to finalize the price of the security offered, and have a significant impact on how successfully an IPO performs. Their role is therefore essential for companies needing to raise capital on the securities market, offering a link between issuing companies and potential investors.

Explanation

The primary purpose of book runners in the business and finance world is to administer the process of public issuance of securities for companies who seek to raise capital through the public markets. This includes both the initial public offering (IPO), where shares of a company are sold to institutional investors and usually also retail (individual) investors, and further issuance of securities in the secondary market. Book runners are usually investment banks that take the lead in these processes and have the essential responsibility for ensuring the success of the offering.In their role, book runners are also tasked with determining the initial price of the offering, relying on their expertise in the market and financial analysis. They manage the order book, which comprises of all the bids from potential investors, and subsequently determine the final issue price. Furthermore, book runners maintain contacts and communications with investors, underpinning the campaigning efforts of the issue. Overall, the role of a book runner is pivotal to the landscape of the financial market, fueling the process of capital raising and enabling the growth and expansion of businesses.

Examples

1. Goldman Sachs as Book Runner: In 2019, Goldman Sachs acted as the book runner for a major part of Uber’s IPO. They helped with underwriting the securities, determining the final IPO price, managing shares and ensuring the distribution of shares to investors.2. JPMorgan Chase & Co: In the IPO of Zoom Video Communication in 2019, JPMorgan Chase was designated as the book runner. They were responsible for keeping a register of the bids from the investors during the preparation for the IPO. They also played a critical role in setting the initial offering price and selling shares.3. Morgan Stanley: Known for their work as major book runners, Morgan Stanley was the lead book runner for the Snapchat IPO in March 2017. They oversaw the offering process, including due diligence, regulatory filings, and pricing allocation.

Frequently Asked Questions(FAQ)

What are Book Runners?

Book Runners can be banks or other financial institutions responsible for the main operational task of an initial public offering (IPO) process. Simply put, they help manage the IPO by determining the initial price and quantity of the product.

What roles do Book Runners play in an IPO?

Book Runners play a significant role in an IPO process. They primarily gather bids, help price the offering and allocate shares. They also are responsible for due diligence and ensuring compliance with regulatory laws.

How does a Book Runner determine the price of the IPO?

Book Runners utilize a process called ‘book building’ where they gather bids from interested investors and determine an optimal price point that would cause shares to be fully sold.

Can there be more than one Book Runner for a single IPO?

Yes, sometimes multiple Book Runners are involved in larger IPOs. In these cases, one is designated as the ‘Lead’ or ‘Global Coordinator’.

Do Book Runners have any responsibilities after the IPO?

Yes, Book Runners often play a role in stabilizing the price of the securities immediately following the IPO. This may involve buying back securities that were oversold or selling more if the demand was underestimated.

How are Book Runners compensated for their work?

Book Runners typically receive a commission based on the size of the IPO. This can be a significant amount, especially for large IPOs.

How do companies select their Book Runners?

Companies generally choose their Book Runners based on a variety of factors including their reputation, previous track records with IPOs and their presence in target markets for the securities offering.

Related Finance Terms

  • Initial Public Offering (IPO): This is the event through which a private company becomes publicly traded. Book runners play a significant role in determining the initial offering price of the securities.
  • Underwriting: The process of raising money by either debt or equity, in which Book Runners play a major part. They take on a risk by buying all the shares from the issuer and selling them to the public.
  • Capital Markets: These are venues where savings and investments are channelled between suppliers and those in need of capital. Book runners help in connecting these two parties.
  • Syndicate: A group of investment banks and brokerages that jointly underwrite and distribute a new security offering to the market. The Book Runner is usually the lead underwriter in this group.
  • Due Diligence: A thorough investigation of a company and its financial conditions, often completed prior to a business transaction. As a part of their role, Book Runners often perform due diligence before they price an IPO.

Sources for More Information

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