A purchased deal involves an underwriter purchasing new shares at a discounted price and reselling them to investors, providing an opportunity for the underwriter to earn a return. The benefits include guaranteed profitability for the issuer and a significant discount for the buyer, but there is also some risk involved if the shares cannot be resold within the desired period.
A purchased deal is a matter of new shares that are purchased by a single underwriter, with the intention of reselling those shares to investors. Often the underwriter involved in the transaction is an investment bank or some type of investment syndicate. The overall strategy of the purchased deal calls for securing the shares associated with the offering at a discounted price, then reselling the purchased shares at current market value, a move that provides the underwriter with a significant opportunity to earn a return on the deal.
There are a couple of key benefits associated with a purchased deal. For the entity issuing the shares, there is no need to worry about funding risk. Since all shares are sold in advance, profitability is guaranteed. In situations where the offering of new shares was intended to generate the capital the issuer needs now rather than later, this means there is no waiting or speculation about how long it will take to sell the shares.
The buyer or subscriber also benefits from the buying strategy. Often the discount applied to these types of volume purchases is significantly higher than with fully traded offerings, where an underwriter must actively market the shares to potential investors to establish the purchase price. This means that the underwriter gets the shares at a great price and can make a lot of money from the resale of the shares.
While the benefits of a purchased deal are obvious, the deal is not without some degree of risk. In the event that the underwriter is unable to resell the shares within the desired period of time, there is no choice but to hold the shares for a period of time that may be considerably longer than originally anticipated. During that time, the money invested in the purchase of the shares remains tied up in the agreement and cannot be used to pursue other investment options.
If the market value of the shares falls below the purchase price during this interim period, the underwriter loses money instead of making a profit. Fortunately, most underwriters who make use of a long strategy tend to project future stock price movement before actually committing to the purchase. This helps keep risk to a minimum, while helping the underwriter set a price that ultimately sets the stage for a return.
Smart Asset.
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