A new issue of shares takes place when a company is floated on the stock market. Subsequently, the company’s shares are traded on what is known as the secondary market.

Pricing
Even if you are investing in a good company at issue, this is not enough in itself for you to make a profit. The price must be right.

The key point is that a new issue of shares is priced according to demand. In a bull market, where institutional investors are competing for shares in every hot new issue almost regardless of its quality, the price can be much higher than the company’s fundamental value. But it is the best time to buy and sell new issues at a profit. In a bear market the price can be lower, which may prove a bargain in the medium or long term, but not necessarily.

The syndicate
The investment bank or broker organizing the deal is known as book runner and sometimes global coordinator. It sets the price and manages distribution of the shares. The job of book runner is sought after, and the fees are often high. Banks compete for this role by making formal presentations to the issuing company. It is quaintly termed a beauty parade.

In a large new issue of shares, two banks are often appointed as joint global coordinators and joint book runners. The book runner will probably have a track record of floating similar companies and a good understanding of the business.

The fees charged are a factor in winning the business but are rarely the priority. Most IPOs and secondary placings are handled by banks that have a corporate relationship with the issuing company, according to research from investment bankers.

The bank that wins the mandate may have expertise in the company’s sector or a special relationship with its country of origin. But any conflict of interests will rule out an appointment.

The chosen book runner appoints a syndicate of banks to help place stock with institutions and private clients, and announces an overall fee structure. In the syndicate there may be one local bank that typically handles private clients (known as retail). The other banks will probably sell mainly to institutions, but there is no fixed rule. Every bank in the syndicate is given a prestigious title such as co-lead manager or co-manager.

Pre-marketing
Next comes the pre-marketing phase of the deal, where banks meet with institutional investors to assess demand for the shares. The book runner accordingly sets an indicative price range to provide perimeters within which the new issue will be priced. The bank often makes this range public.

Valuations
Once they know the price range, analysts can put forward a valuation on the company to be listed, based on respective issue prices at the lower, mid and upper end of the range. Financial journalists may report analysts’ valuations and provide critical comment. Nothing is definitive until the deal is actually priced, owing to the following three factors:

In practice
In June 2006, the certainties became apparent after global stock markets had declined sharply although, as it turned out, temporarily, in value. Standard Life, the mutual life insurer, was one company that cut the price range on its flotation, and many planned share issues were cancelled.

Demand creation
The price range in any deal plays a crucial role in attracting institutional investor demand for the shares. If the book runner values an issue low enough in setting the range and, ultimately, the price, it encourages over-subscription.

In a bull market, over-subscription may happen anyway because institu¬tional investors that want stock will always apply for more than they expect to receive. Demand for new equity issuance is created in part through controlled release of news to the media.

This is the task of the PR agencies. Skilful PR can mitigate the damage of adverse news but will not necessarily remove it. There are always a few maverick journalists who refuse to accept the company’s official line. For more on PR and press shenanigans.

Book build
Following the pre-marketing of a deal and the setting of a price range, the banks start to build up the book of demand for the new issue. In a road-show lasting two or three weeks, they present the company to institutional investors, either in groups or, more effectively, in one-to-ones. The road-show can extend across continental Europe and the United States as well as the UK, and may be supplemented by video-conferencing for countries not visited. The road-show demands time from the company’s chief executive, finance director and head of investor relations, which takes them away from running the business.

Institutional interest is fickle and can wane on adverse company, sector or market conditions. Investors tend to hold off their orders for shares until the last minute. The book runner and syndicate put up with all this uncertainty because the business, if it goes ahead, is usually highly lucrative.

Clients
Syndicate bankers normally give priority of allocation to institutional clients, but welcome the involvement of private investors because they help to swell the order book.

Private investors make a significant contribution to holding up the com¬pany’s share price in secondary market trading because they are less inclined to sell out quickly. If they are involved, banks can price the new issue higher.