What Is a Bought Deal?
In the high-stakes casino of the stock market, a bought deal is akin to betting big without peeking at your cards. This financial maneuver is used primarily by listed companies looking to raise capital swiftly for acquisitions or other expansionary pursuits. Rather than hitting up every shareholder individually via a rights issue or placing, a company does the Wall Street equivalent of calling up the big rollers—market makers or banks—and invites them to a bidding war over new shares. The highest bidder wins the pot of shares, then hustles to sell them off to the general market, hoping to pocket a profit.
Originated in the star-spangled banners of the USA, bought deals are making a splash across the pond in the UK as well, despite ruffling some feathers under the stiff upper lips of pre-emption rights advocates.
How Does a Bought Deal Work?
Imagine you’re a company with grand dreams but a less grand cash reserve. You’d call in a heavyweight financial institution to take off those shares from your hands at an agreed-upon price, faster than you can say “liquid assets.” This institution then turns around and, like a magician pulling rabbits out of hats, sells these shares to eager investors hoping the stock price holds up.
The Controversy Surrounding Bought Deals
Not everyone is tossing roses at this approach. Bought deals often bypass traditional pre-emption rights, the shareholder’s VIP pass to buy new shares before outsiders. Critics argue this could dilute existing shareholders’ stakes without offering them a first refusal, turning a perhaps once cozy shareholder meeting into a less cordial congregation.
Comparative Insights
- Rights Issue: Knocking on each shareholder’s door offering extra shares. More democratic but slower.
- Placing: More selective than rights issues, placing involves selling shares to a chosen few, often institutional investors.
- Competitive Bought Deal: Adds a bit of spice by having multiple bidders which might improve the deal’s terms for the company.
- Placed Deal: Another term often used synonymously with placing.
Related Terms
- Rights Issue: An offer to current shareholders to purchase additional stock, usually at a discount.
- Placing: Selling a large number of shares quickly to institutional investors.
- Pre-emption Rights: Rights that allow existing shareholders to maintain their proportional ownership.
- Competitive Bought Deal: An alternative to simple bought deals where terms might be better due to competition among buyers.
- Vendor Placing: Involves the sale of shares directly from an existing shareholder rather than the issuance of new ones.
Suggested Reading
For those looking to get a more scholarly grip on bought deals and their nuances, the following books might be worth the investment:
- “Capital Markets and Corporate Governance” by Nicholas Moloney - Delve deeper into the mechanisms of how companies interact with capital markets.
- “The Law of Finance” by Alastair Hudson - Explore the legal frameworks surrounding finance, with a touch on bought deals and shareholder rights.
Remember, whether diving into or veering away from bought deals, doing your homework always pays off—sometimes literally in the stock market’s ever-spinning wheel of fortune.
