Underwriters help expand the market for stock sales
I've been following Erickson Air-Crane's quest to sell stock. Why do they need investment firms to sell their shares?
— Bill V., Central Point
Investment banking firms are the go-between for companies trying to sell stock to the public and people wanting to buy shares.
They become underwriters, providing a preliminary valuation of the company. They factor in a predicted growth rate for both the company and its industry, and figure what the price-to-earnings ratio might be for comparable publicly traded companies.
Underwriters get a commission based on a percentage of the value of shares they sell. In essence, investment banks buy the shares first and then distribute them. They take a cut on overall size of the offering, paying for the work they do and the risk of whether they can get rid of the shares. If they get caught holding shares and the market tanks and values go down, the investment bank can lose a lot of money. So in essence, the underwriters try to sell the shares before they buy them.
The lead underwriter, generally sells the largest proportion of shares and gets the highest commission.
Adding additional underwriters accomplishes two tasks: First, the underwriters may expand the marketing of the company's shares; and second, the managing underwriters reduce their risks and speed distribution by allocating shares to other investment banks.
These so-called syndicate members can either purchase and resell shares or market them to their institutional and individual clients.
D.A. Davidson & Co., a regional investment firm, is participating in the potential sale of Erickson Air-Crane shares. But local investors can still go through their own broker. If demand is high, however, brokerages will sell to established customers first.
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