Bought Deal: A Capital-Raising Method

A comprehensive look at the bought deal, a method of raising capital by inviting market makers or banks to bid for new shares, becoming increasingly popular in various markets.

A bought deal is a method of raising capital for acquisitions or other purposes, used by listed companies as an alternative to a rights issue or placing. The company invites market makers or banks to bid for new shares, selling them to the highest bidder, who then sells them to the rest of the market in the expectation of making a profit.

Historical Context

Bought deals originated in the USA and have gained popularity due to their efficiency and speed in raising capital. Over time, this practice has also become increasingly common in the UK and other markets, although it remains controversial because it violates the principle of pre-emption rights, which give existing shareholders the first opportunity to buy new shares.

Key Events in the Development of Bought Deals

• Early Adoption: Initiated in the United States financial markets as an alternative to more traditional methods like rights issues.
• Spread to the UK: Gradually adopted in the UK market due to its efficiency, despite some resistance.
• Modern Usage: Now widely used in various global markets, especially for urgent capital requirements.

Types/Categories

• Competitive Bought Deal: Multiple market makers or banks are invited to bid, creating a competitive environment to maximize the capital raised.
• Placing Deal: Shares are placed with investors directly, which is different from a bought deal where shares are sold to market makers or banks first.
• Vendor Placing: A variation where shares are issued to satisfy a purchase or settlement with a vendor.

Detailed Explanations

Mechanics of a Bought Deal

• Invitation to Bid: The company issues an invitation to market makers or banks to bid for the new shares.
• Highest Bidder: Shares are sold to the highest bidder.
• Resale to Market: The buyer then sells these shares in the market, ideally at a profit.

Advantages and Disadvantages

• Advantages:
  • Speed: Quick way to raise capital.
  • Efficiency: Minimal disruption to existing shareholders.
  • Market Confidence: Immediate funds demonstrate financial strength.
• Disadvantages:
  • Pre-emption Rights Violation: Existing shareholders may feel bypassed.
  • Market Risk: Market conditions can impact resale profitability.

Mathematical Formulas/Models

The pricing model for a bought deal can be understood through basic supply and demand principles in the financial market. A simple formula to calculate the potential profit (P) for the bidder can be represented as:

$$ P = (S_{m} - S_{b}) \times N $$

Where:

• \( S_{m} \) = Market price per share
• \( S_{b} \) = Bid price per share
• \( N \) = Number of shares purchased

Charts and Diagrams in Hugo-Compatible Mermaid Format

    graph TD
	    A[Company Issues New Shares] --> B[Invitation to Market Makers/Banks]
	    B --> C[Market Makers/Banks Bid]
	    C --> D[Highest Bidder Buys Shares]
	    D --> E[Highest Bidder Sells to Market]
	    E --> F[Potential Profit from Market Price Difference]

Importance and Applicability

Importance

• For Companies: Provides quick capital for acquisitions or other significant financial needs.
• For Investors: Offers opportunities for institutional investors to buy large quantities of shares at potentially favorable terms.

Applicability

• Urgent Capital Needs: Best used when companies need to raise funds quickly.
• Strategic Acquisitions: Ideal for funding acquisitions without diluting existing shareholder value extensively.

Examples

• Tech Industry: A technology company might use a bought deal to quickly raise funds for acquiring a startup.
• Real Estate: A real estate firm might employ a bought deal to finance the purchase of a new property portfolio.

Considerations

For Companies

• Market Conditions: Assess the current market environment before initiating a bought deal.
• Shareholder Communication: Transparency with shareholders regarding the capital-raising strategy.

For Investors

• Risk Assessment: Evaluate the potential risks and rewards of participating in a bought deal.
• Timing: Timing is critical to maximize profitability from the resale of shares.

Related Terms

• Rights Issue: Offering existing shareholders the right to buy additional shares at a discounted price.
• Placing: Directly placing shares with institutional investors.
• Vendor Placing: Issuing shares to satisfy a purchase agreement with a vendor.

Comparisons

Bought Deal vs. Rights Issue

• Bought Deal: Faster and involves bidding by market makers or banks.
• Rights Issue: Slower and gives existing shareholders the first right to buy new shares.

Bought Deal vs. Placing

• Bought Deal: Shares sold to highest bidder for resale in the market.
• Placing: Shares are placed directly with investors without bidding.

Interesting Facts

• Controversial Nature: Bought deals are sometimes controversial due to bypassing pre-emption rights.
• Global Reach: Initially popular in the USA, now used globally.

Inspirational Stories

Notable Case Study

• Company XYZ: Successfully used a bought deal to raise $200 million in just 24 hours, enabling a swift acquisition and market expansion.

Famous Quotes

• “Speed is the essence of war.” - Sun Tzu

Proverbs and Clichés

• “Time is money.”
• “Strike while the iron is hot.”

Jargon and Slang

• Green Shoe Option: Allows the underwriter to sell additional shares, typically related to bought deals.
• Hot Issue: A term used when a bought deal is oversubscribed due to high demand.

FAQs

What is a bought deal?

A bought deal is a method of raising capital where a company sells new shares to the highest bidding market maker or bank, which then resells these shares in the market.

How does a bought deal differ from a rights issue?

In a bought deal, shares are sold to the highest bidder and resold in the market, while in a rights issue, existing shareholders are given the first opportunity to buy additional shares.

Why are bought deals controversial?

Bought deals are controversial because they bypass pre-emption rights, which allow existing shareholders to purchase new shares before anyone else.

References

1. Smith, J. (2020). “Capital Markets: Instruments and Techniques.” Financial Publishing.
2. Johnson, L. (2018). “Modern Financial Strategies.” Economic Times Press.
3. Financial Times. (2022). “Trends in Capital Raising.”

Summary

A bought deal is a strategic method for raising capital quickly by inviting bids from market makers or banks for new shares, which are then resold in the market. While it offers advantages like speed and efficiency, it remains controversial for violating pre-emption rights. Understanding its mechanics, importance, and implications is essential for companies and investors alike.

---

This comprehensive coverage ensures readers are well-informed about bought deals, their significance, and their strategic implications in the financial markets.