Page 167 - Initial Public Offering - An Introduction to IPO on Wall Street

syndicate are allowed to purchase the shares from the business to sell to investors, based on the
make-up of the offering. This eliminates a major risk for the issuing business as it is paid in
advance by the syndicate for the stock and is thus not concerned with selling the stock of shares
to buyers; the underwriting syndicate takes on that risk.

By distributing the risk among all the participants in the group, the risk that an underwriter
syndicate takes on is minimized, particularly for the lead underwriter. Because the underwriting
syndicate has undertaken to sell the entire issue, if the market for it is not as strong as hoped,
the members of the syndicate will have to keep part of the issue in their possession, exposing
them to the risk of a price decline.
The lead underwriter earns a greater percentage of the underwriting spread and other
compensation in exchange for taking the lead position, while a smaller percentage of the spread
and compensation is earned by the other members in the syndicate.

10.2 The Syndicate Explained

A syndicate is a group of stakeholders who come together to decide the price of an offering
and publicly sell new IPOs. When determining the price, the syndicate takes different factors
into consideration including the risk involved and the company's financial position.

In general, syndicates are established when the stock issue is too big to be handled by a single
entity. Thus, integrating the efforts of many entities allows to rapidly and fully selling the new
offering of shares.

A lead underwriter who is responsible for facilitating the IPO is the one in charge of the
syndicate. Senior executives of investment banks are the traditional members of an

Page 167