ECM is the business of raising equity capital for clients. The flagship product is the initial public offering: a private company sells stock to public investors for the first time. ECM also handles follow-on offerings (additional equity issued by an already-public company), at-the-market offerings (continuous selling at prevailing market prices), convertible bonds (debt that can convert into equity), and rights issues (where existing shareholders are offered new shares pro rata).
The IPO process
An IPO is a long process — typically 4-9 months from kickoff to first trade. It begins with the bank pitching to win the lead-bookrunner role. Once mandated, the bank organises the diligence process, drafts the prospectus jointly with the company's lawyers (the 'red herring' preliminary version, then the final filed version), conducts management roadshows with institutional investors, builds the order book, prices the offering on the night of the deal, and allocates shares the next morning. The first trade typically happens the day after pricing.
Pricing and the first-day pop
Pricing is where the bank's reputation and judgment matter most. Price the deal too high and it 'breaks issue' — trading below the offer price on the first day, embarrassing the company and the bank. Price it too low and the company leaves money on the table. The bank's job is to find the highest price at which the offering will be 'covered' — that is, where institutional demand exceeds supply by enough to support the stock in early aftermarket trading. Long-running rules of thumb suggest 5-15% first-day pop is healthy. Anything more starts to look like the bank deliberately underpriced to favour its institutional clients.
The fee economics
The fees on an IPO — the gross spread — are typically 5-7% of proceeds for US deals, paid by the issuer and split among the underwriting syndicate. The lead bookrunner takes the largest share, around 20-25% of the gross spread, plus a Praecipuum (a separate fee) for running the books. Active joint bookrunners take 10-15% each. Co-managers take a few percent. The remaining 30-40% is the underwriting allowance and selling concession, distributed in proportion to actual selling done.
Lock-ups are nearly universal: insiders and pre-IPO holders agree not to sell their shares for 90-180 days after the IPO. This prevents an immediate flood of supply that would crater the stock. The lock-up expiration is itself a market event — the first trading day after lock-up release is often weak as previously locked-up shares hit the market.
Follow-ons, ATMs, convertibles
Follow-ons are simpler. A company files a registration statement, the bank takes a few days to a few weeks to market and price the offering, and proceeds typically take a small discount (3-7%) to the prevailing market price. ATM offerings are even simpler: the company files a shelf and dribbles stock into the market at prevailing prices over months or years. Convertibles are technically structured products: the bank prices them as a combination of a bond and a call option, and they appeal to issuers because the embedded option value reduces the explicit interest cost.
Exercise
A company prices its IPO at USD 18.00 per share, offering 25 million primary shares plus a 15% over-allotment option (the greenshoe). The stock opens at USD 24.30, closes its first day at USD 23.50, and trades at USD 22.80 a week later. (1) What's the first-day pop? (2) What is the dollar amount raised by the company if the greenshoe is fully exercised? (3) What is the gross spread the syndicate earns at 6% of proceeds, and how does that split among lead bookrunner, joint bookrunners, and co-managers? (4) The CEO calls the bank, angry that the stock traded 25% above the IPO price by close — money 'left on the table.' How does the senior banker respond?