Page 170 - Initial Public Offering - An Introduction to IPO on Wall Street

10.2.2 How the Underwriting Syndicate Works
Since the participants of the syndicate are dedicated to the sale of all the stocks offered, they
must purchase shares from the issuer and sell them publicly. The practice exposes them to the
possibility of declining prices. By distributing the risk between all syndicate members, they
minimize this risk.

A higher number of shares may be provided to certain members of the syndicate and thus
they will get a higher percentage of the underwriting spread. To prevent any disputes
regarding the process of sharing, syndicate members typically sign an agreement specifying
the number of stocks allotted fees and their rights and responsibilities.

Price vs. Demand for IPO

Once the IPO has been released and made public, there is generally a higher demand at the
beginning for the stocks. The market for shares can, in some cases, outweigh the supply. This
would drive up the rates investors have to pay to become shareholders in the business of the
issuers. As demand declines, initial price rises are often accompanied by price fluctuations.

The Process of Determining the IPO Price

When deciding the price of an IPO, several steps are taken by the underwriting syndicate.
First, the underwriters pursue sales staff seasoned in IPOs, stock trading, and evaluating
growth opportunities for pricing details. A meeting is then held where only the members of
the underwriting syndicate are allowed to participate.

In deciding the price of the IPO, the participants use a closed bidding mechanism. Once the
members agree on an IPO price, a proportion of the shares will then be distributed before the
IPO is released in the market. After the IPO is released in the market, based on the adjustments
in the IPO price, the members of the syndicate will share the gains or losses.

10.3 Agreement between Underwriters

Participants of an underwriter syndicate generally sign an agreement that outlines the
allocation of the stock to each party and the management fee along with other rights and
responsibilities. The lead underwriter manages the syndicate and assigns shares to each
syndicate member that may not be equally distributed among the participants of the
syndicate.

The following is the complete list of things that are addressed by the agreement between the
underwriters:

 Appoints the leading underwriter and the additional underwriters involved
 Establishes the allocation or percentage of the offer to be given to each member
 Sets out the life of the syndicate
 Establishes the process by which securities are to be offered i.e. underwriters agree to buy
the issuer's securities from them or try to place them on a best-effort basis
 Normally, once the securities have been placed, the offering syndicate disintegrates,
typically within 60 days, or often sooner if mutually agreed.

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