5.10 Shares as a Source of Cash 225other advisers; the duties of the issuer (for example, participation in a due
diligence); the fees; and how the contract can be terminated.
The issuer will also have to choose how shares will be subscribed for. There are
various flotation methods. It is common that a bank or a consortium will subscribe
for shares and sell them to the public.^448 In that case, the issuer and the lead bank
will have to choose a consortium of other participating banks.
In the Ahlstrom IPO, SEB Enskilda, a Swedish bank, acted as global coordinator, lead
manager and bookrunner. Calyon, a French bank, and Opstock, a subsidiary of a Finnish
bank, acted as co-lead managers.
In the US, the most common way of raising equity is to use an underwriter. Tirole de-
scribes the procedure as follows:^449 “The underwriter may guarantee the proceeds of the
shares in case of undersubscription; the underwriter can then sell the unsold shares at a
lower, but not at a higher, price than the price stated in the public offering. This is the ‘firm
commitment’ contract institution. The risk borne by the underwriter is limited, though, if,
as is often the case, the price is fixed shortly before the offering. By contrast, under a ‘best
efforts’ contract, the underwriter does not bear the risk of offer failure; and the offer is
withdrawn if a minimum sales level is not reached within a specified amount of time.”
Pricing method. The issuer will always have to choose a pricing method. While
traditional company law rules tend to be based on the assumption that a fixed price
is payable for shares, other methods are used in modern business practice.
One of the most common methods is “bookbuilding”. The bookbuilding method
includes the following steps: preliminary pricing of securities during the pre-
marketing phase (meaning that important investors will be interviewed); choice of
a price range (instead of a fixed price); marketing measures and roadshows; order
taking (institutional and private investors may order a certain amount of shares
and choose the price they are prepared to pay); and closing.
In the Ahlstrom IPO, the offering consisted of two parts because of the bookbuilding
method. The Institutional Offering to Finnish and international institutional investors
comprised initially 7,300,000 shares. The Retail Offering to retail investors in Finland
comprised initially 700,000 shares. The initial offer price range was €20.00–24.00 per
share.
Method of signalling lower price risk. The choice of a pricing method is
complemented by the choice of methods that signal a lower price risk to potential
investors. The same methods help the issuer to ensure that the IPO will succeed.
The firm will usually try to ensure that the subscription price is not too low and
that there will not be a rapid short-term price rise when trading begins. The firm
will also try to ensure that the subscription price is not too high in the light of
market changes and that the share price will not collapse soon after trading has
begun.
(^448) See Article 8(2) of Directive 77/91/EEC (Second Company Law Directive).
(^449) Tirole J, The Theory of Corporate Finance. Princeton U P, Princeton and Oxford (2006)
pp 94–95.