4. Choosing Your Investment Banker 25

Selecting the right underwriter
Your initial contacts with the investment banking firm will likely be with representatives whose responsibility is to bring in new clients and new transactions. Make sure that you also meet and evaluate the research analyst on your account and the appropriate people on the trading desk to assure yourself that the managing underwriting firm is committed to your offering.
You have put together a team of experts with the skills and talents to advise you in your IPO. But it’s the underwriter who actually puts it all together for you. A company’s dependence upon an underwriter for a successful IPO is, therefore, very great. That is why it is of unique and critical importance that you are familiar with the IPO process before you begin, and that you know how to select the right underwriter for your company. You should also understand the basics of your underwriting agreement, as well as with valuation and pricing issues, and theafter-market support you can expect from the underwriter you choose.
The underwriter in brief
You can go to market without an underwriter, but the process is so complex and theknow-how so specialized that it is rarely done. The complicated market issues that are arcane to most people are the stock-in-trade of underwriters, and it is in the best interest of your company’s offering to take advantage of their expertise. The “value added” by your underwriter should be the assurance that your IPO will be properly managed and successfully marketed and supported, both before and after going public.
Your principal, or “managing” underwriter will work with you to develop the registration statement, coordinate the road show, underwrite certain risks, and form a syndicate. This syndicate is composed of an underwriting group — which bears the risk of the underwriting — and the selling group. The selling group solicits interest from its retail and institutional clients, sells your stock once your IPO goes effective, and provides after-market support. The typical allocation of the underwriter’s discount is 20 percent for the managing underwriter, 20 percent for the underwriting group, and 60 percent for the selling group. The share allotment each underwriter is committed to buy will be stipulated in
the prospectus.
Good managing underwriters and investment bankers have a highly developed sense of what sells (or doesn’t sell) and for how much. They also have an instinct for timing an issue, and they are able to anticipate pitfalls and calculate risks. Underwriters and investment bankers contribute other skills and support, including:
Experience in marketing, structuring the deal, and facilitating syndications with co-underwriters and brokers to create support for the stock after it is issued;
Knowledge of market conditions and various types of investors;
Experience in pricing stock so that it will be attractive to the company but also reap a reasonable return for the investor;
PricewaterhouseCoopers LLP Roadmap for an IPO
25

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