What is Breaking Syndicate?
The whole point is to transition the new stock from a controlled sale to openly trading on the market. Breaking the syndicate is a crucial step in that process.
Lock-Up Period for Early Investors
Early investors and company insiders often have to hold their shares for a lock-up period, usually 90-180 days. This includes people like:
- Company founders
- Employees with stock options
- Venture capital firms
The lock-up prevents them from flooding the market with extra shares right after the IPO. That could drive down the stock price.
Underwriters Provide Stability
The underwriters help balance out supply and demand during the lock-up period. Without the syndicate rules, the underwriters can buy or sell shares to keep the price steady if needed. They’re like training wheels for the new stock.
Transition to Normal Trading
After the syndicate is broken, the new shares trade like any other public stock. The company no longer relies on the underwriters; normal market forces of supply and demand take over.
If the company does well, the stock price goes up as more investors buy in. If the company hits a rough patch, the price may fall. But that’s out of the underwriters’ hands now.
The Life Cycle of Going Public
Breaking syndicate is one step in the long process of going from a private to public company.
Step 1: Pick Underwriters
First, the company has to choose which investment banks to hire as underwriters. For a big IPO, they may pick a famous Wall Street firm to be the lead.
Step 2: Due Diligence
The underwriters kick the tires on the company. They dig into the financials, business plan, competitors, risks, and growth potential. This helps them set a fair IPO price.
Step 3: Price and Allocate Shares
Based on the due diligence, the underwriters set an initial price range for the new shares. They also divvy up batches of shares for each underwriter in the syndicate to sell.
Step 4: Drum Up Demand
As the IPO date gets close, the underwriters market the shares to big investors, like pension funds and hedge funds. They want to line up buyers so the shares don’t flop on the first day of trading.
Step 5: Set Final IPO Price
The night before the IPO, the underwriters huddle up and agree on a final price for the new shares based on investor demand. They often pick a price at the high end of the range if the deal is oversubscribed.
Step 6: Shares Start Trading!
IPO day! The company’s shares start trading on the stock market. The underwriters are in the background, carefully selling their allocated shares to keep the price steady. It’s in their interest for the stock to trade above the IPO price.
Step 7: Break Syndicate
About a month after the IPO, the lead underwriter says it’s time to break up the band. The underwriters are released from the syndicate rules. They can buy or sell the new shares as they want.
Step 8: Lock-Up Period Ends
A few months later, company insiders get to cash in once their lock-up period expires. There’s often a big jump in trading volume when all those extra shares hit the market. The company is now just another public stock.
