What syndicate does is provide a vital role in placing stock or bond offerings with buy-siders, and truly aim to find the right offering price that satisfies both the company, the salespeople, the investors and the corporate finance bankers working the deal.

Syndicate and public offerings

In any public offering, syndicate gets involved once the prospectus is filed with the SEC. At that point, syndicate associates begin to contact other investment banks interested in being underwriters in the deal. Before we continue with our discussion of the syndicate's role, we should first understand the difference between managers and underwriters and how fees earned through security offerings are allocated.

Managers

The managers of an IPO get involved from the beginning. These are the I-banks attending all the meetings and generally slaving away to complete the deal. Managers get paid a substantial portion of the total fee - called underwriting discounts and commissions on the cover of a prospectus, and known as the spread in the industry. In an IPO, the spread is usually 7.0 percent, unless the deal is huge, which often means that the offering company can negotiate a slightly lower fee. For a follow-on offering, typical fees start at 5.0 percent, and again, decrease as the deal-size increases.

As discussed previously in this guide, deals typically have between two and five managers. To further confuse the situation, managers are often called managing underwriters, as all managers are underwriters, but not all underwriters are managers. Confused? Keep reading.

Underwriters

The underwriters on the deal are so called because they are the ones assuming liability, though they usually have no shares of stock to sell in the deal. They are not necessarily the I-banks that work intimately on the deal; most underwriters do nothing other than accept any potential liability for lawsuits against the underwriting group.

Underwriters are selected by the lead manager in conjunction with the company. This role is often called participating in the syndicate. In a prospectus, you can always find a section entitled "Underwriting," which lists the underwriting group. Anywhere from 10 to 30 investment banks typically make up the underwriting group in any securities offering.

In the underwriting section, the list of each participant has next to it listed a number of shares. While underwriting sections list quite a few investment banks and shares next to each bank, it is important to realize that these banks do not sell shares. Neither do they have anything to do with how the shares in the deal are allocated to investors. They merely assume the percentage of liability indicated by the percentage of deal shares listed in the prospectus. To take on such liability, underwriters are paid a small fee, depending on their level of underwriting involvement (i.e., the number of shares next to their name). The managers in the deal will account for the liability of approximately 50 to 70 percent of the shares, while the underwriters account for the rest.

Why the long diversion into the mechanics of what an underwriter is and how much they are paid?

Because this is what syndicate spends considerable time doing. Syndicate professionals:

• Make sure their banks are included in the underwriting of other deals
• Put together the underwriting group in deals the I-bank is managing
• Allocate stock to the various buy-side firms indicating interest in deal
• Determine the final offering price of various offerings

What is involved on a day-to-day basis? Quite a bit of phone time and quite of bit of dealing with the book.

The book

As mentioned earlier, the "book" is a listing of all investors who have indicated interest in buying stock in an offering. Investors place orders by telling their respective salesperson at the investment bank or by calling the syndicate department of the lead manager. Only the lead manager maintains (or carries) the book in a deal.

Orders can come in one of two forms - either an order for a specified number of shares at any price, or for a specified number of shares up to a specified price. Most buy-siders indicate a price range of some kind. Often, large institutions come in with a "10 percent order." That is the goal of the managers, and means that the investor wants to buy 10 percent of the shares in the deal.

In terms of timing, the book comes together during the roadshow, as investors meet the company's management team. Adding to the excitement, many investors wait until the day or two prior to pricing to call in their order. Thus, a manager may not know if they can sell the deal until the very last minute. The day before the securities begin to trade, syndicate looks at the book and calls each potential buyer one last time. It is important to ferret out which money managers are serious about owning the stock/bonds over the long haul. Those that don't are called flippers. Why would a money manager choose this strategy? Because in a good market, getting shares in the offering is often a sure way to make money, as stocks usually jump up a few percentage points at the opening bell. However, flippers are the bane of successful offerings. Institutional money managers who buy into public deals just to sell their shares on the first day only cause the stock to immediately trade down.

Pricing and allocation

How does syndicate price a stock? Simple - by supply and demand. There are a fixed number of shares or bonds in a public deal available, and buyers indicate exactly how many shares and at what price they are willing to purchase the securities. The problem is that most deals are oversubscribed; i.e., there are more shares demanded than available for sale. Therefore, syndicate must determine how many shares to allocate to each buyer. To add to the headache, because investors know that every successful deal is oversubscribed, they inflate their actual share indications. So, a 10 percent order may in fact mean that the money manager actually wants something like 2 or 3 percent of the deal. The irony, then, is that any money manager that actually got as many shares as she asked for would immediately cancel her order, realizing that the deal was a "dog."

In the end, a combination of syndicate's experience with investors and their instincts about buyers tells them how many shares to give to each buy-sider. Syndicate tries to avoid flippers, but can never entirely do so.

After the book is set, syndicate calls the offering company to report the details. This "pricing call," as it is called, occurs immediately after the roadshow ends and the day before the stock begins trading in the market. Pricing calls sometimes results in yelling, cursing and swearing from the management teams of companies going public. Remember that in IPOs, the call is telling founders of companies what their firm is worth - reactions sometimes border on the extreme. If a deal is not hot (as most are not), then the given price may be disappointing to the company. "How can my company not be the greatest thing since sliced bread?" CEOs often think.

Also, company managers often mistakenly believe that the pricing call is some sort of negotiation, and fire back with higher prices. However, only on rare occasions can the CEO influence the final price - and even then only a little. Their negotiating strength stems from the fact that they can walk away from a deal.

Managers will then be out months of work and a lot of money (deal expenses can be very high). An untold number of deals have been shelved because the company has insisted on another 50 cents on the offered share price, and the syndicate department has told management that it simply is not feasible. It may sound like a pittance, but on a 20 million share deal, 50 cents per share is a whopping $10 million in proceeds to the company (less underwriting fees).

Who works in syndicate?

As for the players in syndicate, some have MBAs, and some don't. Some worked their way up, and some were hired directly into an associate syndicate position. The payoffs in syndicate can be excellent for top dogs, however, as the most advanced syndicate pros often deal directly with clients (management teams of companies doing an offering), handle pricing calls, and talk to the biggest investors. They essentially become salespeople themselves, touting the firm, their expertise in placing stock or bonds, and their track record. Occasionally, syndicate MDs will attend an important deal pitch to potential clients, especially if he or she is a good talker. At the same time, some syndicate professionals move into sales or other areas, often in order to get away from the endless politicking involved with working in the syndicate department.

Beginners in the syndicate department help put together the book, schedule roadshow meetings and work their way up to dealing with investors, other I-banks, and internal sales. Because syndicate requires far fewer people than other areas in the bank, fewer job openings are to be found. Rarely does a firm recruit on college campuses for syndicate jobs - instead, firms generally hire from within the industry or from within the firm.