What is a Takedown?
How Does a Takedown Work?
When a company decides it wants to
To begin the process, the underwriter and the first determine the kind of offering the issuer needs. Let's say Company XYZ wants to sell via an initial public offering (IPO). After determining the offering structure, the underwriter usually assembles what is called a syndicate to get help managing the minutiae (and risk) of particularly large offerings. A syndicate is a group of other banks and brokerage firms that commit to sell a certain percentage of the offering (this is called a guaranteed offering because the underwriters agree to pay the issuer for 100% of the shares, even if they can’t sell them all).
After the syndicate is assembled, the issuer files an SEC Form S-1, which is also called a prospectus and discloses all material information about the issuer. Prospectus in hand, the underwriter then sets to selling the securities. Because there may not be a firm offering price at the time, purchasers usually subscribe for a certain number of shares. This process lets the underwriter gauge the demand for the offering.
Once the issuer and the underwriter agree on how to price the securities and the SEC has made the registration statement effective, the underwriter calls the subscribers to confirm their orders. If the demand is particularly high, the underwriter and issuer might raise the price and reconfirm this with all the subscribers.
Once the underwriter is sure it sell all of the shares in the offering, it closes the offering. Then it purchases all the shares from the company (if the offering is a guaranteed offering). This purchase price is called the takedown. The issuer receives the proceeds minus the fees.
The underwriters then sell the shares to the subscribers at the offering price.
Why Does a Takedown Matter?
The takedown price is like a wholesale price. It is important to
Underwriters grease the skids for bringing securities to . For example, if XYZ Company had a public offering price of $10 per share, XYZ Company might only receive $9 per share if the takedown is $9 per share. The $1 spread compensates the underwriter and syndicate for three things: negotiating and managing the ; assuming the risk of buying the securities if nobody else ; and managing the of the shares. Making a market in the securities also generates commission revenue for underwriters.
As we mentioned earlier, underwriters take on considerable risk. Not only must they advise a client about matters large and small throughout the process, they relieve the of the risk of trying to sell all the shares at the price. Underwriters often mitigate this risk by forming a syndicate whose members each share a portion of the shares in return for a portion of the fee.
Underwriters work hard to determine the "right" price for an offering, but sometimes they "leave on the table." For example, if XYZ Company prices its 10-million-share IPO at $10 per share but the shares trade at $30 two days after the IPO, the underwriter probably underestimated the demand for the . As a result, XYZ Company received $150 million (less fees) when it could have possibly fetched $300 million.