Definition
A Western Account, also known as Divided Account, is a type of underwriting method. In this approach, each underwriter in a syndicate is responsible only for selling their specific allotment of shares. If an underwriter is unable to sell their share, they aren’t obligated to cover unsold portions from the other members of the syndicate.
Phonetic
The phonetic pronunciation of “Western Account” is: “Wes-tern Eh-kount”.
Key Takeaways
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Importance
The term “Western Account,” also known as a “divided account,” is an important business/finance concept because it pertains to the level of responsibility taken on by underwriters during an initial public offering (IPO) or secondary offering. In a Western Account arrangement, each underwriter in the syndicate is only responsible for the portion of shares they have committed to sell, rather than the entire offering. This can reduce the potential risk or liability for each individual underwriter, which can make larger deals more manageable and potentially encourage more participation from a wider range of underwriting firms. However, it also means that if one underwriter fails to sell their allotment, the others are not required to make up the difference, which could potentially impact the overall success of the offering.
Explanation
The Western Account, also known as Divided Account or Undivided Account, is largely used in the context of syndicate underwriting within the field of finance. The term refers to a syndicate agreement wherein the underwriters are only responsible for their allotted portion of an issue. This implies that underwriters are individually responsible, and each underwriter has a specific obligation for a percentage of the total offering. The purpose of Western Account is to proportionally distribute the risk among all the underwriters involved in the process.Often, a western account is employed when a large number of securities are being issued, such as in an initial public offering (IPO). Underwriters typically utilize this arrangement so they would only be accountable for the unsold portion of their specific allotment, without any joint liability. This structure serves to mitigate the risk for each underwriter in the situation of unsuccessful issues. Hence, a Western Account is purposeful not just to manage the distribution of large number of securities but also as a risk management tool in underwriting syndicates.
Examples
1. Royal Dutch Shell Rights Issue (2005): In one of the largest rights issues of that time, Royal Dutch Shell used the Western Account to manage its global operations effectively. The company raised $10 billion through various transactions accounted for under the western account, which helped it access funds globally by managing all subscriptions from shareholders on an aggregated basis.2. Investment in International Monetary Fund (IMF): Countries contribute to the IMF’s financial resources by paying a quota subscription which is outlined in the IMF’s Western Account. Each member country is assigned a quota that broadly reflects its relative position in the world economy. The accounting system ensures transparency and clarity of the resources available.3. Vodafone Group’s rights issue (2019): Vodafone Group’s £3.4 billion rights issue in 2019 was another notable instance of a Western Account. The multinational telecommunications company used the strategy to successfully handle investor subscriptions from multiple countries, manage potential oversubscription, and allocate shares more evenly among existing shareholders.
Frequently Asked Questions(FAQ)
What is a Western Account?
A Western Account, also known as a standby underwriting agreement, is a type of underwriting arrangement. The underwriter agrees to purchase all unsold shares after the public offering, minimizing financial risk for the company going public.
How does a Western Account work?
In a Western Account, the underwriter’s obligation is for unsold shares only. This means they will buy any remaining shares left over from the initial public offering (IPO), but they are not required to purchase any beyond that.
What is the benefit of a Western Account for a company?
The main advantage for the company is that it has a greater certainty of raising a certain amount of capital. The underwriter agrees to take up unsold shares, helping prevent any shortcoming in expected capital from the sale of shares.
What is the risk for underwriters in a Western Account?
The underwriters take on the risk of unsold shares. If the market doesn’t respond well to the IPO and many shares go unsold, the underwriter is obligated to purchase them.
How does a Western Account differ from an Eastern Account?
The main distinction between these two is the obligations of the underwriters. In an Eastern Account, also known as a divided or undivided account, underwriters are jointly responsible for any unsold shares. With a Western Account, each underwriter is only responsible for the shares they specifically agreed to underwrite.
When should a company consider a Western Account?
A company should consider a Western Account when they want to ensure a certain amount of capital is raised, despite potential lack of interest in the public market.
What are the legal responsibilities associated with a Western Account?
Each underwriter in a Western Account has a legal obligation to purchase all of their allocated unsold shares. The failure to fulfill this obligation can result in legal consequences. Always consult with a legal expert before entering any kind of underwriting agreement.
Related Finance Terms
- Underwriting Syndicate: The group of investment banks involved in the initial public offering (IPO) process, which is often referenced when discussing a Western account.
- Eastern Account (Undivided Account): A term directly contrasted with Western Account, where the liability of each underwriter for unsold shares isn’t limited to its own underwriting agreement.
- Initial Public Offering (IPO): The basis of a Western account, as it refers to the distribution of shares during an IPO.
- Securities: A broad term referring to the shares, bonds, and other investment products distributed in processes involving a Western Account.
- Underwriter: A key player in a Western Account, as underwriters are responsible for selling the securities in an IPO.
Sources for More Information
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