What is a Bought Deal?

A bought deal is an issue of new shares that is purchased by a single underwriter, with the intent of reselling those shares to investors. Often, the underwriter involved in the transaction is an investment bank or some type of investing syndicate. The general strategy of the bought deal calls for securing the shares associated with the offering at a discounted price, then reselling the acquired shares at the current market value, a move that provides the underwriter with a significant opportunity to earn a return on the deal.

There are a couple of key advantages associated with a bought deal. For the entity that issues the shares, there is no need to be concerned about financing risk. Since all the shares are sold up front, earning a return is assured. In situations where the offering of new shares was intended to generate capital that the issuer needs now rather than later, this means no waiting, and no speculation about how long it will take for the shares to sell.

The buyer or underwriter also benefits from the bought deal strategy. Often, the discount applied to this type of volume purchase is significantly more than with fully marketed offerings, where an underwriter must actively market the shares to potential investors in order to set the purchase price. This means that the underwriter gets the shares at an excellent price and stands to earn a great deal of money from the resale of the shares.

While the benefits of a bought deal are obvious, the arrangement is not without some degree of risk. In the event that the underwriter is unable to resell the shares within the desired time frame, there is no choice but to hold the shares for a time that may be considerably longer than originally envisioned. During that time, the money invested in the purchase of the shares remains tied up in the deal, and cannot be used to pursue other investment options.

Should the market value of the shares fall below the purchase price during this interim, the underwriter loses money rather than turning a profit. Fortunately, most underwriters who make use of a bought deal strategy tend to project the future movement of the share prices before actually committing to the purchase. This helps to keep the risk at a minimum, while also helping the underwriter to set a price that ultimately sets the stage for earning a return.