by Reverse Book-Building is a process used primarily for determining the price of a security during buyback offers or tender offers, rather than through a traditional method where the issuer or seller sets the price. In reverse book-building, the price is decided by the shareholders or investors who express their willingness to sell their securities, and the issuer or buyer then determines the final price based on the demand.
This method is commonly used in buyback offers, where a company repurchases its own shares from the existing shareholders, or in delisting offers, where a company may wish to remove its shares from a stock exchange.
Reverse book-building allows the company to gauge the price at which shareholders are willing to sell their securities, offering more flexibility compared to the fixed price model.
Process of Reverse Book-Building:
- Announcement of Offer:
The company first announces its intention to buy back its shares or securities through a reverse book-building process. This announcement contains the maximum price the company is willing to pay, the number of shares it intends to buy back, and the time frame during which shareholders can submit their offers.
- Submission of Bids:
Shareholders wishing to sell their shares during the buyback or tender offer will submit their bids. In this bid, shareholders state the number of shares they are willing to sell and the price at which they are willing to sell those shares. It is essential to note that shareholders can submit their bids within a price range specified by the company.
- Collection of Bids:
The company collects all the bids submitted by shareholders. These bids can vary based on the price the shareholders are willing to accept. The bids can be submitted either online or through other means prescribed by the company.
- Price Determination:
Once the bidding period concludes, the company reviews all the bids received. The company will then determine the final buyback price by considering the lowest price at which it can buy back the required number of shares. This process is termed price discovery. The company can accept all bids at the final determined price or reject bids above the final price.
- Acceptance of Shares:
Once the price is determined, the company accepts the shares at the decided price. In some cases, if the demand exceeds the maximum number of shares the company wants to repurchase, a pro-rata allocation system may be used. The accepted shares are then bought back from shareholders at the final price determined by the reverse book-building process.
- Payment and Settlement:
Once the shares are accepted, the company proceeds to settle the payments with shareholders. The amount corresponding to the shares accepted is credited to the shareholders’ bank accounts, and the shares are canceled or removed from circulation.
Advantages of Reverse Book-Building:
- Market-Driven Pricing:
Reverse book-building allows the price to be determined based on market demand, ensuring that shareholders get a fair price for their shares. This flexibility benefits both shareholders and the company as the price reflects the price at which shareholders are willing to part with their securities.
- Transparency:
The reverse book-building process is transparent as shareholders are aware of the pricing range and can submit their bids within that range. It also prevents manipulation of the share price, as it reflects actual market sentiment.
- Flexibility in Pricing:
The reverse book-building method provides companies with the flexibility to buy back shares at market-determined prices, allowing for a more accurate and fair price discovery process compared to traditional fixed-price buybacks.
- Investor Confidence:
Shareholders may feel more confident in participating in the buyback process as the price is determined by their own bids. This may encourage higher participation in the buyback offers.
- Optimal Capital Management:
Companies use reverse book-building as an efficient method to manage their capital structure. By buying back shares at market-driven prices, the company can optimize its equity base and improve earnings per share (EPS).
Disadvantages of Reverse Book-Building:
- Market Fluctuations:
Since the price is determined based on the bids submitted by shareholders, it may be influenced by short-term market fluctuations. If there is a significant drop in the market, the final buyback price could be lower than what shareholders expected.
- Low Participation Risk:
If shareholders are not willing to offer their shares at a price close to the company’s maximum buyback price, the company may fail to achieve its buyback target. This could lead to inefficiency in terms of the company’s capital management plans.
- Complex Process:
The reverse book-building process can be more complex and time-consuming than a traditional fixed-price offer. This complexity arises from the need to collect, analyze, and evaluate a large number of bids from different shareholders.
- Increased Administrative Costs:
Companies may incur higher administrative and processing costs when conducting a reverse book-building process. These costs arise from the need to handle the submission of bids, evaluate the bids, and process the payments.
- Potential for Mispricing:
While reverse book-building aims to reflect market sentiment, it is possible for a company to misjudge the demand or for certain investors to submit high or low bids that do not reflect the true market value of the shares.
Applications of Reverse Book-Building
Reverse book-building is commonly used in two key scenarios:
- Buyback Offers:
Companies use reverse book-building to buy back their own shares from the market, which helps reduce the number of shares in circulation. This is often done to improve earnings per share (EPS), return capital to shareholders, or increase ownership concentration.
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Delisting Offers:
Reverse book-building is also used by companies wishing to delist from the stock exchange. Shareholders are invited to tender their shares at market-based prices, and the company then decides on the price at which it will buy back the shares to facilitate delisting.
