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Lead Underwriter

What is 'Lead Underwriter'

A investment bank or other financial outfit that has the primary directive for organizing an initial public stock offering, or a secondary offering for companies that are already publicly traded. The lead underwriter will usually work with other investment banks to establish a syndicate, and thereby create the initial sales force for the shares. These shares will then be sold to institutional and retail clients.

The lead underwriter will assess the company financials and current market conditions to arrive at the initial value and quantity of shares to be sold. These shares carry a hefty sales commission (as much as 6-8%) for the underwriting syndicate, with the majority of shares being held by the lead underwriter.

Explaining 'Lead Underwriter'

Being the lead underwriter for a stock offering, especially an initial public offering (IPO), can bring a large payday if the market shows high demand for the shares. Often the stock issuer will allow the lead underwriter to create an over-allotment of shares if demand is high, which can bring in even more money to the underwriting firm. There are substantial risks involved in underwriting stock offerings - any one company could plummet in the open market once public trading begins. This is why the large investment banks, such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers and others will look to conduct many diverse offerings in the course of a year.

One or two great stock offerings a year can be enough to meet company earnings targets, but market conditions as a whole will determine the relative amount of profit the investment banks can earn. In the zooming market phase of the late-1990s, investment banks were making money hand over fist as eager investors gobbled up any new shares that came to market, and traded them much higher once on the exchange. However, when the market collapsed in late-2000, the underwriting community went into hibernation mode, advising even the best private companies to "wait out the storm" before going public.


Further Reading


Why do firms switch underwriters?
www.sciencedirect.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

Reputation and financial intermediation: An empirical investigation of the impact of IPO mispricing on underwriter market valueReputation and financial intermediation: An empirical investigation of the impact of IPO mispricing on underwriter market value
www.sciencedirect.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

Why are IPO investors net buyers through lead underwriters?Why are IPO investors net buyers through lead underwriters?
www.sciencedirect.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

Getting off to a good start: The effects of upper echelon affiliations on underwriter prestigeGetting off to a good start: The effects of upper echelon affiliations on underwriter prestige
pubsonline.informs.org [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

Underwriting relationships, analysts' earnings forecasts and investment recommendationsUnderwriting relationships, analysts' earnings forecasts and investment recommendations
www.sciencedirect.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

The economics of conflicts of interest in financial institutionsThe economics of conflicts of interest in financial institutions
www.sciencedirect.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

Share issue privatizations as financial means to political and economic endsShare issue privatizations as financial means to political and economic ends
www.sciencedirect.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

The lead underwriter reputation and underpricing: study of company's IPO in IndonesiaThe lead underwriter reputation and underpricing: study of company's IPO in Indonesia
www.inderscienceonline.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

The matching of lead underwriters and issuing firms in the Japanese corporate bond marketThe matching of lead underwriters and issuing firms in the Japanese corporate bond market
www.sciencedirect.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …

Are there economies of scale in underwriting fees? Evidence of rising external financing costsAre there economies of scale in underwriting fees? Evidence of rising external financing costs
academic.oup.com [PDF]
… Firms will tend to switch underwriters for the follow-on equity offering if their IPO lead underwriter leaves too much money on the table. At the time of the IPO, an important goal of the underwriting firm is to place shares with buy-and-hold institutional investors …


Q&A About Lead Underwriter


How much money can you make as a lead underwriter?

The sales commission can be as high as 6-8%.

Can you give me another example besides "Merrill Lynch"?

Sure! Some examples include J P Morgan Chase & Co.,

Who else works with the Lead Underwriters besides other Investment Banks?

There may also be co-managers who help out with some aspects of preparing for an IPO (Initial Public Offering). They may not have any input into setting up syndicates or deciding how many shares should be sold; they just help prepare documents and get things ready before it goes live on Wall Street (or wherever).

What is the definition of underwriting?

Underwriting is the process by which investment banks raise capital from investors on behalf of corporations and governments.

What does "Underwriter" mean?

An underwriter refers to a person or institution that agrees to sell a minimum number of securities for commission.

What is a lead underwriter?

A lead underwriter is an investment bank or other financial outfit that has the primary directive for organizing an initial public stock offering, or a secondary offering for companies that are already publicly traded.

Are there risks involved with being a lead underwriter?

Yes, there are substantial risks involved in being a lead underwriter. Any one company could plummet in the open market once public trading begins. This is why large investment banks such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers and others will look to conduct many diverse offerings in the course of a year. One or two great stock offerings a year can be enough to meet company earnings targets but market conditions as whole will determine relative amount of profit investment banks can earn. In zooming market phase of late-199s investment banks were making money hand over fist as eager investors gobbled up any new shares that came to market and trade them on secondary markets."'

How did the name "underwriter" originate?

The name originated from Lloyd's of London, where it was used to describe someone who would accept some risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for payment.

What does the lead underwriter do?

The lead underwriter will assess the company financials and current market conditions to arrive at the initial value and quantity of shares to be sold.

Who are the parties involved in an underwriting arrangement?

The parties involved in an underwriting arrangement are typically a corporation, government, and an investment bank.

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