Equity Capital Markets (ECM)

Finance 101 introduced the IPO as the moment a company's shares first become tradeable. This chapter is about what an ECM banker actually does to make that happen — and the follow-on offerings that happen constantly after a company is already public.

The IPO process, in sequence

1. Selecting underwriters: the company hires one or more investment banks (the lead bookrunner manages the process; other banks join a syndicate to help distribute shares and share the risk).
2. Due diligence and drafting: the underwriters and company lawyers prepare the S-1 registration statement (in the US) — extensive disclosure on the business, financials, and risks.
3. The roadshow: company management, with the bankers, pitches the company directly to institutional investors over roughly one to two weeks — the actual sales process behind an IPO.
4. Book-building: as investors express interest, the underwriters record demand at different price levels in an order book — genuinely similar to the order-book concept from Finance 101's market-microstructure deep dive, just for a brand-new security instead of an already-trading one.
5. Pricing: the night before trading begins, the final IPO price is set based on the demand actually observed in the book — priced to leave some room for a "pop" on day one (rewarding IPO investors and signaling a successful deal) without leaving so much on the table that the company is seen as having sold shares too cheaply.
6. Allocation and first day of trading: shares are allocated to investors (often more demand than supply, meaning many investors get less than they asked for), and the stock begins trading publicly.

The underwriting discount — how ECM banks actually get paid

Underwriters typically buy the shares from the company at a discount to the final offer price and resell them to investors at that offer price — the underwriting discount (or "gross spread"), commonly around 3.5-7% for a traditional IPO, is the difference.

Worked example: a company IPOs 20 million shares at $25/share = $500M raised at the gross level. With a 5.5% underwriting discount, underwriters keep 5.5% × $500M = $27.5M, and the company actually receives $500M − $27.5M = $472.5M net.

Follow-on offerings — raising more once already public

A follow-on offering is an already-public company selling additional new shares — for growth capital, to pay down debt, or to fund an acquisition. A secondary offering (a related but distinct term) is existing shareholders (often early investors or company insiders) selling their own shares, with the company itself receiving no proceeds. Both dilute existing shareholders' ownership percentage (more total shares outstanding), which is exactly why a follow-on announcement often causes an immediate, real stock price reaction — the market repricing for the dilution before the new capital has even had a chance to be put to use.

Why pricing an IPO well is a genuinely hard problem

Price it too high, and the stock falls on day one — a bad outcome for the investors who bought in, and reputationally damaging for the underwriters on the next deal. Price it too low, and the company's existing shareholders have given away value unnecessarily (this is exactly the "money left on the table" criticism that follows large first-day IPO pops). Balancing real, observed investor demand against the company's own capital-raising goals — while managing what happens on day one — is the actual skill an ECM banker is being paid for, not just running the mechanical process.