Lead Underwriter

What Is a Lead Underwriter?

The term lead underwriter refers to an investment bank or another financial organization that has the primary directive for organizing an initial public stock offering (IPO) or a secondary offering for public companies.

A lead underwriter usually works with other investment banks to establish an underwriter syndicate and is responsible for assessing the company's financials and current market conditions to arrive at the initial value and number of shares to be sold.

How Lead Underwriters Work

Underwriters assess and evaluate risks. They are commonly found working in the insurance and mortgage industries, along with the debt and equity markets. Underwriters also help companies during their quest to go public — that is, when they go through the IPO process. They do this by helping companies prepare for the offering and by serving as the intermediary between the company and potential investors.

Some companies may require more than one underwriter when the offering is far too large to handle. The primary underwriting company, referred to as the lead underwriter, puts together a group of underwriters. This group is called an underwriter syndicate — a temporary group that works together to help bring corporate offerings to the market.

The lead underwriter has a series of responsibilities including completing a prospectus that is filed with the Securities and Exchange Commission (SEC). Once the paperwork is filed, the main underwriter can then take the initial steps that lead to the actual offering. This includes developing roadshows, which allow the company's key personnel to hold presentations about the firm and its upcoming offering to generate public interest.

Strong investment banks are more likely to be associated with a qualified IPO, so research the lead underwriter if you want to invest in a new offering.

Determining the final offering price is one of the lead underwriter's major responsibilities, which it does in conjunction with the issuer. This is done by determining the size of the proceeds and determining how easily investors will purchase the securities.

Once a price is determined and the SEC makes the registration statement effective, the underwriters call the subscribers to confirm their orders. If demand is particularly high, the stock issuer may allow the lead underwriter to create an over-allotment of shares. Both parties may decide to raise the price and reconfirm the sale with subscribers. This is called a greenshoe option.

Special Considerations

Being the lead underwriter for a stock offering — especially for an IPO — can bring a large payday if the market shows a high demand for these shares. They carry a hefty sales commission — as much as 6% to 8% — for the syndicate, with the majority of shares held by the lead underwriter. This commission can increase when greenshoe options are offered. That's because of the enormous demand that some offerings bring.

But there are substantial risks involved in underwriting stock offerings. Any company could plummet in the open market once public trading begins. This is why large investment banks, such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers, and others will look to conduct many diverse offerings in the course of a year. One or two great offerings a year can be enough to meet company earnings targets, but market conditions as a whole generally determine the relative amount of profit that investment banks can earn.

In the zooming market phase of the late-1990s, investment banks made a lot of money as eager investors gobbled up any new shares that came to market, and traded them much higher once on the exchange. However, when the market collapsed in late-2000, the underwriting community went into hibernation mode, advising even the best private companies to wait out the storm before going public.