A bought out deal is a method of offering
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
to the public through a sponsor or
underwriter
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...
(a bank, financial institution, or an individual). The securities are listed in one or more
stock exchanges within a time frame mutually agreed upon by the company and the sponsor. This option saves the issuing company the costs and time involved in a
public issue. The cost of holding the shares can be reimbursed by the company, or the sponsor can offer the shares to the public at a premium to earn profits. Terms are agreed upon by the company
The
Securities and Exchange Board of India mandates that only private companies can choose this method of issuing securities.
Features
* Parties – There are three parties involved in a bought out deal; the promoters of the company, sponsors & co-sponsors who are generally merchant bankers and investors
* Outright sale – There is an outright sale of a chunk of equity shares to a single sponsor or a lead sponsor
* Syndicate – The sponsor forms a syndicate for management of resources required & distribution of risk
* Sale Price – The sale price is finalized through negotiations between the issuing company & the purchaser which is influenced by reputation of the promoters, project evaluation, prevailing market sentiment, prospects of off-loading these shares at a future date, etc.
* Fund base – The bought out deals are fund based activities where funds of merchant bankers get locked in for at least the prescribed minimum period.
* Listing – The listing generally takes place at a time when company is performing well in terms of profits & liquidity.
Advantages and disadvantages
Advantages
* Speedy sale – The bought out deals offer a mechanism for speedy sale of securities involving lower issuing cost.
* Freedom – The bought out deals offer freedom for promoters to set a realistic price & negotiate the same with the sponsor.
* Investor protection – The bought out deals facilitates better investor protection as the sponsors are rigorously evaluated and appraised by the promoters before off-loading the issue
* Quality offer – The bought out deals help in improving the quality of capital flotation and primary market offering.
Disadvantages
* Sponsors may take control of the company as they own large number of shares.
* When markets are down sponsors may incur losses.
* The risk of
market manipulation
In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
by the sponsor such as
insider trading is high.
* Sponsors can make large profits at the expense of small investors.
See also
*
Bought deal
*
Private placement
*
Underwriting contract In investment banking, an underwriting contract"The Investment Banking Handbook" by J. Peter Williamson, 1988, ""Underwriting Contracts", p. 128/ref> is a contract between an underwriter and an issuer of securities.
The following types of underwri ...
*
Underwriter
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...
References
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Securities (finance)