Example Of Essay On The Role Of Investment Bankers And Underwriters

Type of paper: Essay

Topic: Company, Finance, Investment, Risk, Exchange, House, Commerce, Banking

Pages: 3

Words: 825

Published: 2021/01/02

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IPO for a global firm

Companies not listed on the stock exchange use the IPO as a way of raising capital to finance expansions and other activities. This paper uses the IPO of Sysorex Global Holdings Corporation to explain the role of or investment bankers, underwriters, originating house, syndicates in IPOs. It also explores the risks facing firms participating in global IPOs.

Investment bankers carry an important role of advising the corporation, underwriting and distributing the securities (Scott-Quinn, 2012). Investment bankers advise the company on the best ways to go about the IPO as well as on financial matters such as mergers and acquisitions. In some cases, investment bankers guarantee to purchase the securities of the firm that are not purchased at the end of the IPO. They, therefore, help in raising capital for the companies and other businesses.
Underwriters help in the distribution of the securities offered for sale. They buy the securities from the corporation and use their well-developed networks to sell the securities (Scott-Quinn, 2012). In most cases, underwriters are well-known firms with established networks. In addition, they assist the issuing house in setting the price for the securities.

The role of an originating house and a syndicate

Originating house refers to an investment brokerage which may be one firm or a group of investment bankers (Scott-Quinn, 2012). Originating house undertakes the role of managing the underwriting process, as well as the sale of the securities to the public. The originating house leads the underwriting process. A syndicate, on the other hand, is an investment bank or a group of investment bankers that are invited to the process by the originating house. Syndicates help the originating houses by buying and reselling the securities to either the public or private institutions. Syndication normally takes place when the IPO is so enormous that it cannot be completed by the originating house only (Scott-Quinn, 2012). In the IPO of Sysorex, its originating house was a group of two firms. The firms were Wellington Shields LLC and Dougherty & Company LLC.

Pricing of the issue

Investment bankers and underwriters have a difficult task of setting the appropriate price for the security to be issued (Scott-Quinn, 2012). The initial price may be set at par or premium or discount. The determination takes into account several factors such as the amount of capital required by the issuing company, ability of the underwriters to sell the shares, among other factors. A higher price may keep away potential investors hence the company will not raise the required amount of capital. Most underwriters prefer setting lower prices to attract investors to purchase the securities, and the investors will be readily willing to buy other securities issued by the company in the future. Underwriters have the responsibility of ensuring all the issued securities are sold (Scott-Quinn, 2012). In some underwriting agreements, underwriters have the obligation of buying any unsold shares. They, therefore, resort to setting lower prices in order to sell the required amount.

Risks involved and laws to deal with them

The main risks facing a firm in an IPO are underpricing and high withdrawal probability. An underpriced IPO will result in the company raising less than the amount it requires hence the IPO may not assist it in raising additional capital. Investors may also withdraw and initiate legal proceedings against the company as well as the underwriter. The company may, therefore, lose money in litigation claims.
Insurance companies offer policies that can mitigate the loss from underpricing the securities. In addition, issuers and underwriters are protected the provisions of the Private Securities Litigation Reform Act. The act raises the bar thus making it difficult for an investor to file a suit successfully against the company and the underwriter for claims of fraud. This will help in reducing litigation costs.

Foreign exchange risks

The company will face risks resulting from changes in exchange rates. After the pricing of the IPO, it takes time for the IPO to be closed. During this period, the exchange rate may change in an undesirable direction. This implies that when foreign investors purchase the securities, Sysorex will receive less than it would have received at the time the IPO was opened. Unfavorable foreign exchange movements may result in the company receiving less than the required capital even if all the securities are purchased. The same risk is faced when paying dividends to the foreign investors. This is because there is always a lapse of time between the date of dividend declaration and its subsequent payment. Changes in interest rate will also be a source of risk to the issuing company.
In order to reduce foreign exchange risk, the company can use derivative assets. In this case, Sysorex can purchase a buy option from a financial institution. The company will, therefore, be able to sell the underlying stock at an agreed price and an exchange rate irrespective of the movements in the exchange rate. In addition, forward and futures contract can be used by Sysorex to hedge against the exchange risk.


Scott-Quinn, B. (2012). Commercial and investment banking and the international credit and
capital markets. Houndmills, Basingstoke: Palgrave Macmillan

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