Question

An underwriting firm such as Morgan Stanley or Goldman Sachs serves as the quarterback in an initial public offering (IPO). Its functions include providing advice to the issuing company (the issuer), underwriting the issue, and marketing the issue. Explain what those functions entail and, if you were the CFO of the issuing company, how you would assess the performance of the underwriting firm in carrying out its job?

Answer 1

Functions of underwriting firms in respect of assistance to a company issuing Initial public offers are-

1.Providing advice to the issuing company (the issuer)- Underwriters provide advice related to timing of issuance of shares, The valuations at which shares are being issued , How much stake is to be liquidated etc.

2.Underwriting the issue- It is the process of analysing various kinds of risks and exposures and then identifying with appropriate time period and opportunities to issuance.it is a highly complex excercise involving a lot of analytical assessment.

Underwriting involves conducting reserch and accessing the degree of risk of each applicant or entity before assuming that risk. It also give a portion of guarantee in case the issue is not fully subscribed.

3.Marketing the issue-It is the final step involving advertising the issue so that various group of people subscribe to issue.It is a step involving inducing IPO to a large group og HNI'S and retailers .

If I was the CFO of the issuing company, I would look for the past performance of the underwriting company along with the valuations and listing premiums .I would also look for their negotiation skills along with the portion of equity which is being liquidated.