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RESEARCH NEWS

The more the merrier

by CFO Staff
Publication: CFO Magazine, Economist.com

October 1, 2005


When planning an initial public offering, companies should carefully consider whom they plan to invite to the party - and then expand the guest list, according to a University of Notre Dame study.

Companies that go public with the support of a large syndicate, and, in particular, more co-managers, tend to obtain better pricing, generate more analyst coverage, and secure more market-makers than those with just one or two underwriters, say the study's authors, Shane Corwin and Paul Schultz, of Notre Dame's Mendoza College of Business. The report was based on more than 1,500 companies that went public between 1997 and 2000. "We expect larger syndicates to uncover more information, resulting in a greater number of accurately priced IPOs," says Corwin.

When Builders FirstSource, a $2 billion building-products seller based in Dallas, went public in June, a large syndicate was a vital part of the successful offering. In addition to two lead underwriters, UBS and Deutsche Bank, the company enlisted three co-managers. "We were looking for a blend of national and regional coverage," says CFO and senior vice president Charles Horn. The firms divided road-show duties according to which underwriter had the closest ties with each potential investor, says Horn.

The offering was three-times oversubscribed at the offering price of $16, giving the stock a boost in aftermarket trading. (Builders's stock recently closed at $21.57.) Trading support and analyst coverage have also been strong.

Managing such a large group is not easy. "It's a challenge with the upfront diligence," says Horn. "Each of the five firms wants to get comfortable with the company." Meetings and phone calls clogged the CFO's calendar in the days leading up to the offering, and haven't abated now that he's working with multiple analysts. "It did put a lot more pressure on me," he says, "but I think the payback is really worth it." - K.O'S.