An undivided account is an initial public offering (IPO) structure in which multiple underwriters share the responsibility for placing any unsold shares. In this arrangement, each underwriter commits to taking on the shares that other underwriters fail to sell, fostering a collective responsibility for the entire issue. This type of arrangement is often referred to as an eastern account and differs from a western account, where underwriters only take responsibility for their allocated shares.
Key Takeaways
- In an undivided or eastern account, each underwriter agrees to assist in selling shares that remain unsold by other syndicate members.
- Underwriters handle the process of preparing and marketing the IPO, right from establishing the share price to placing the shares with initial buyers.
- Western accounts only hold each underwriter responsible for their specific share of the total stock issue, with no requirement to assist others.
- Undivided accounts carry higher risks and potential for greater rewards compared to western accounts.
- Eastern accounts are often preferred because an underwriter can participate with minimal upfront investment while sharing in potential profits.
Understanding Undivided Accounts
When a company is ready to launch an IPO, it passes on the responsibility of marketing its shares to one or more underwriters. These financial specialists manage the entire IPO process, including setting the share price and selling the shares to initial buyers such as large financial institutions and brokerages.
In an undivided or eastern account, responsibilities are collectively shared. For example, if one underwriter is responsible for 15% of a stock issue, it will also help place the remaining shares if the entire issue isn’t sold. This collaborative approach contrasts with a western account, where each underwriter is only liable for their specific assigned shares without a provision to support others.
Underwriting Accounts and Agreements
Assuming the issuance of new bonds or stocks involves considerable risk, as underwriters agree upfront to pay the issuer a certain amount irrespective of the final sale price. To mitigate this risk, underwriters often form syndication agreements that distribute both the risks and rewards. Typically, one participating firm administers these syndicates, and eastern accounts are commonly used. While the risks are higher in eastern accounts than western accounts, the same goes for the potential rewards. By participating in an eastern account with a syndicate, an underwriter can enjoy a percentage of the profits with a relatively small initial investment.
Terms of an Eastern Agreement
Underwriters may incorporate a market-out clause in the underwriting agreement to safeguard themselves. This clause voids their purchase obligation if the security quality is compromised or if adverse effects impact the issuer. However, issues like poor market conditions or overpricing do not trigger this clause.
The details of the syndication include the fee structure, the percentage of shares or bonds each syndicate member commits to selling, and the underwriting terms—whether under a western or eastern account basis. Several types of underwriting agreements exist, such as firm commitment agreements, best efforts agreements, mini-max agreements, all-or-none agreements, and standby agreements.
Related Terms: IPO, eastern account, western account, underwriting agreement, standby agreement.
