What is Accelerated Book Building? (Explained)

Accelerated book building helps a company quickly raise equity capital within a few days. This method is used as a direct placement method by the issuing companies.

Let’s discuss what accelerated book building is and what its advantages are for the issuing company.

What is Accelerated Book Building?

Accelerated book building is a process of determining share prices and offering shares quickly. In other words, it is a quicker book-building process.

Accelerated book building requires a few days only as this process does not involve marketing. In this process, the bidding company approaches an investment bank that acts as an underwriter.

The underwriter then directly approaches a few selective investors and obtains share price quotes. The whole process is completed within two or three days.

Companies use an accelerated book-building process to access the equity capital market. This option is often used when debt financing is not available.

Also, this method of raising equity capital is used when a company requires cash quickly. It can directly approach a few selective corporate investors to get share price offers and then place shares with them according to the calculated share price.

What is Book Building?

Book building is an alternative to the traditionally used fixed pricing method in an initial public offering (IPO). It is a process to determine the price and willingness of investors for a particular company.

An investment bank acts as the underwriter in a book-building process as well. The bank asks for bids from its client base or other institutional investors.

Interested parties set their bidding prices for the company and demand the number of shares. It helps the investment analyze the price and demand for that company.

The investment bank then discloses the obtained price bids publicly. Then, it uses the available demand bids to create a suitable share price for going public.

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So, the process involves a more controlled share price as compared to an IPO. It also helps investment banks in understanding the demand for the shares at these specific prices.

How Does Accelerated Book Building Work?

As the name suggests, the accelerated book-building process is a quicker book-build method to obtain equity capital from the market.

It follows these steps in a few days or hours in some cases.

In the first step, the issuing firm assigns an investment bank as its underwriter. The investment bank has delegated the task of determining the share price and demand for the issuing company and raising equity capital.

The investment bank then contacts large institutional investors and wealthy individuals to place bids for their required shares. In an accelerated book-building process, this offer period is open for only two or three days.

Then, the investors place bids at their preferred prices and ask for a specific number of shares from the investment bank.

The investment bank then analyzes these bids and prepares the average share price. This price is then used to first offer shares to bidders with the highest bids.

Finally, the underwriter allocates shares to each bidder as per their required demand. Also, the underwriter discloses the share price and bids from all investors for transparency purposes.

Examples

HSBC Saudi Arabia has recently completed an accelerated book-building process for Al-Marai company.

HSCB acting as the underwriter, secured bids for 16 million shares of Al-Marari accounting for roughly 2% of the company’s share capital.

Last year, when Affirm went public through an IPO, it also used the book-building process. Morgan Stanly, Goldman Sachs, and Allen & Co LLC acted as underwriters for Affirm.

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The Singapore Sovereign Fund GIC sold around 93 million shares of a Swiss Bank USB through the accelerated book-building process. This share transfer accounted for roughly 2.4% of outstanding shares and voting rights for GIC in the USB bank.

Accelerated Book Building Vs. Initial Public Offering

The book-building process can also be used to determine the issuing company’s share price. Although most companies use this method to allocate shares directly to institutional investors and raise equity capital directly.

Therefore, it becomes an integral part of the IPO process. The investment bank acting as the underwriter then determines a fair market value of the issuing company’s share.

Once the investment bank discloses price bids obtained from different investors, it calculates an average share price. This price then becomes a reference price for the IPO date.

An initial public offering may use a fixed pricing method as well. In that process, an investment bank and institutional investors propose a fixed share price for the issuing company.

Once the issuing company and the investment bank agree on a fixed share price, they’ll launch the public offering at the same price.

Why Do Companies Opt for Accelerated Book Building?

Accelerated book building is a quick and cheaper method of raising equity capital as compared to the initial public offering process.

Investment firms can use the accelerated book-building process to acquire other companies as well. It can be used to complete a hostile takeover of a competitor or any other firm.

Moreover, companies use this method when debt financing is not available or too costly. Debt financing may also come with covenants and stricter repayment terms.

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The book-building process can be used in a couple of ways. The reverse book-building method can be used to buy back shares from acquirers as well.

However, the main purpose behind an accelerated book-building process remains to raise equity capital quickly.

Advantages of Accelerated Book Building

The accelerated book-building process comes with several advantages to the issuer company.

First, it reduces the risk for the underwriter bank who undertakes the responsibility of buying and then selling all shares from the issuing company.

Second, this process uses a pre-determined share price of the issuing company’s share rather than a fixed price. So, the price determination process is more flexible.

Third, investment banks offer quick access to their network of large corporate and individual investors for issuing companies.

Fourth, the issuing company can use this method to raise equity capital quickly when it cannot raise debt capital.

Finally, the accelerated book-building process is cheaper than the traditional IPO process.

Disadvantages of Accelerated Book Building

Despite several advantages, the accelerated book-building process comes with some disadvantages as well.

First, the lower cost of the process for the issuing company is a disadvantage to the underwriter as there are lower commissions and processing fees.

Second, the issuing company is at risk of receiving significantly lower share prices than in an IPO. Therefore, it may not raise equity capital as required.

Third, an accelerated book-building process offers only a few days to investors for the bidding and due diligence process. Therefore, investors are always at risk of losing investments without careful analysis.

Finally, using the bidding prices obtained through an accelerated book building may not be suitable for an IPO.