What is a Bought Deal?
A bought deal is a special way companies can raise money. They sell stocks or bonds all at once to banks or big investors. These banks and investors buy everything the company wants to sell. The company knows exactly how much money it will get.
How Does It Work?
In a bought deal, the company works with a main bank. This bank is called the lead manager. The lead manager finds other banks and investors to help buy the stocks or bonds. They all agree to buy a set amount.
The banks buy everything first. Then they sell it to regular people and other investors. The company gets its money no matter what. Even if the banks can’t sell everything, the company still gets paid.
Why Do Companies Like Bought Deals?
Bought deals are fast. The company can get a lot of money all at once. They don’t have to wait and see if people want to buy.
Bought deals are also a sure thing. The company knows how much money it will get. There is no guessing. This helps the company plan for the future.
The Banks’ Role
The banks in a bought deal take on risk. They agree to buy everything before they know if they can sell it.
Lead Manager
The lead manager bank is in charge. It works with the company to set the price and amount of stocks or bonds. It also finds other banks to help buy everything.
The lead manager does a lot of work. It looks at how well the company is doing. It also looks at the market to see what price will work. It wants to set a price that is fair but also helps the banks make money.
Other Banks
The other banks are called underwriters. They agree to buy some of the stocks or bonds from the lead manager.
These banks help spread out the risk. The lead manager doesn’t have to buy everything alone.
How the Shares Get Sold
Once the banks buy the stocks or bonds, they have to sell them. They want to do this quickly. The faster they sell, the more money they can make.
Setting the Price
The banks try to set a price that will make the shares sell fast. If the price is too high, people won’t want to buy. If it’s too low, the banks won’t make as much money.
The banks look at the market to choose the right price. They want people to feel like they are getting a good deal.
Finding Buyers
The banks have teams of salespeople. These salespeople call up regular investors like people and companies. They explain why the stocks or bonds are a good buy.
The banks might also advertise the shares. They want to get people excited about buying.
Pros and Cons for Companies
Bought deals have good and bad points for companies.
Pros
- Fast money. The company gets a lot of cash very quickly.
- No worry. The company doesn’t have to worry if the stocks or bonds will sell. It gets paid no matter what.
- Good sign. Doing a bought deal shows the company is in good shape. Banks don’t want to buy from companies that might fail.
Cons
- Lower price. The banks buy at a discount price. The company could maybe get more money another way.
- Less control. The company can’t change its mind once the deal is made. It has to sell at the agreed price and amount.
Pros and Cons for Banks
The banks also have to think carefully about bought deals.
Pros
- Quick sale. If the banks choose well, they can sell the shares fast. This means more profit.
- Good relationships. Working closely with companies helps banks build strong ties. This can lead to more business in the future.
Cons
- High risk. The banks have to buy everything. If they can’t sell it, they lose money.
- Reputation. If the banks choose a bad company, it makes them look bad. People might not trust them as much.
