Bought Deal

A bought deal is an accelerated equity offering in which a single underwriter (usually an investment bank) commits to purchase the entire block of shares from the issuer at a fixed price before any investor roadshow takes place. The bank then resells those shares to institutional and retail investors, pocketing the underwriting spread as profit or loss depending on market reception.

Why speed matters for corporate finance

In a traditional equity offering, the issuer and investment bank embark on a roadshow, meeting hundreds of institutional investors, gathering indications of interest, and only then pricing the deal based on demand. A bought deal flips this sequence: the underwriter agrees to buy the entire block at an agreed price before talking to a single investor. For a company needing capital urgently—whether to fund an acquisition, shore up balance sheet strength, or launch a competitive response—the certainty and speed are worth the slightly lower price per share.

The issuer trades some upside (the bank negotiates a discount to what the market might bear) for absolute certainty that capital will be raised within days. There is no risk that investors will balk and the deal will be downsized or repriced mid-roadshow. For small-cap or turnaround stocks, where institutional sentiment is uncertain, this certainty can be worth 3–5% of the offering size.

How the underwriter captures the spread

The bought-deal structure is the investment bank’s highest-leverage revenue model. On day one, the bank pays the issuer a fixed price—say $10 per share for a 100-million-share block, totalling $1 billion upfront. The bank then has roughly 3–7 days to place those shares with investors. If the bank is skilled and the market cooperative, it sells them at $10.30 or higher, capturing the $30-million-plus spread. If market sentiment deteriorates or the company’s news is poor, the bank might only get $9.90, absorbing a $10-million loss.

This is why underwriters are selective about which bought deals they accept. A bank must have confidence in the issuer’s story, deep relationships with institutional investors, and enough balance-sheet capacity to hold the shares if the market is slow. A hostile takeover target or a company in distress rarely qualifies. The bank’s reputation and capital are on the line.

The syndicate and distribution

Few investment banks underwrite huge bought deals alone. Instead, the lead underwriter forms a syndicate—often 5 to 15 co-underwriters and selling agents—to spread the risk and improve placement. The lead bank keeps the largest share of the underwriting spread, typically 20–30% of the total, while co-managers and selling agents carve up the remainder based on their distribution power and capital contribution.

This structure incentivizes rapid, efficient placement. A selling agent that places 10 million shares quickly earns its commission fee and can move on. A co-manager that warehouses unsold shares for days erodes its profit margin. The entire syndicate is therefore motivated to move the block at a price that sticks.

Bought deals versus traditional IPO roadshows

Traditional IPOs or secondary offerings involve weeks of price discovery. The roadshow is a marketing event: management teams travel the country, pitch to pension funds and hedge funds, and let investor demand surface. Underwriters then price the deal at or slightly below the highest consensus bids, aiming for strong first-day trading and a sense of “we left some money on the table for the investors.”

A bought deal, by contrast, is almost entirely negotiated between the issuer and the lead underwriter. There is no roadshow. Pricing is set by conversation—“At what price can you reliably move 100 million shares in a week?"—not by accumulated investor indications. The downside is that the issuer may not capture as much of the peak demand. The upside is speed and certainty, plus the absence of a three-week period where management attention is consumed by the roadshow and business risk is amplified.

When bought deals make sense

Bought deals are common in Canada, Australia, and parts of Europe, where regulatory regimes and market culture favour them more than in the US. In North America, they tend to be used by issuers that are:

• Financially stressed, needing capital within days to meet an obligation or fund an emergency acquisition
• Well-known and liquid, with seasoned shares that the syndicate can place without difficulty
• Mid-cap or large-cap, where market capitalization and trading volume are high enough that a share block can move without undue price pressure
• In strong markets, when investor appetite for equities is robust and underwriters have ample capital

Startups going public, smaller companies in sector downturns, or issuers with complex or controversial business models rarely use bought deals. The underwriter’s willingness to commit capital upfront is a signal of institutional confidence that can actually accelerate demand among wary investors.

Risk asymmetry and the bank’s advantage

A bought deal is fundamentally a bet by the underwriter on market direction over the next week. If the market rallies 2–3%, the bank’s spread widens and it may even short-cover (sell short and then buy the shares back cheaper when its syndicate finishes placing). If the market drops 2–3%, the bank absorbs losses. Large systematic risk (a sector shock, credit event, or earnings miss) can turn a profitable deal into a heavy loss within hours.

This asymmetry is why underwriters charge a fee above the bare spread and why they scrutinize the issuer’s fundamentals before saying yes. A bank that agrees to underwrite without deep due diligence courts disaster.

See also