Book building is a systematic process of generating, capturing, and recording investor demand for shares during an initial public offering (IPO), or other securities during their issuance process, in order to support efficient price discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or bookrunner.
Book building is an alternative method of making a public issue in which applications are accepted from large buyers such as financial institutions, corporations or high net-worth individual, almost on firm allotment basis, instead of asking them to apply in public offer.
The "book" is the off-market collation of investor demand by the bookrunner and is confidential to the bookrunner, issuer, and underwriter. Where shares are acquired, or transferred via a bookbuild, the transfer occurs off-market, and the transfer is not guaranteed by an exchange's clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.
Book building is a common practice in developed countries and has made inroads into emerging markets as well. Bids may be submitted online, but the book is maintained off-market by the bookrunner and bids are confidential to the bookrunner. Unlike a public issue, the book building route will see a minimum number of applications and large order size per application. The price at which new shares are issued is determined after the book is closed at the discretion of the bookrunner in consultation with the issuer. Generally, bidding is by invitation only to high-net-worth clients of the bookrunner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and bookrunner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All bookbuilding is conducted "off-market" and most stock exchanges have rules that require that on-market trading be halted during the bookbuilding process.
The key differences between acquiring shares via a bookbuild (conducted off-market) and trading (conducted on-market) are:
- bids into the book are confidential vs. transparent bid and ask prices on a stock exchange;
- bidding is by invitation only (only high-net-worth clients of the bookrunner and any co-managers may bid);
- the bookrunner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion;
- all shares are issued or transferred at the same price whereas on-market acquisitions provide for multiple trading prices.
The bookrunner collects bids from investors at various prices, between the floor price and the cap price. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the bookrunner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price.
If demand is high enough, the book can be oversubscribed. In these cases the greenshoe option is triggered.
Book building is essentially a process used by companies raising capital through public offerings, both initial public offers (IPOs) or follow-on public offers (FPOs), to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.
When a company wants to raise money, it plans on offering its stock to the public. This typically takes place through either an IPO or FPO. The book building process helps determine the value of the security. Once a company determines it wants to have an IPO, it will then contact a bookrunner or a lead manager. The bookrunner will determine the price range at which it is willing to sell the stock. The bookrunner will then send out the draft prospectus to potential investors. Generally, the issue stays open for five days. At the end of the five days, the bookrunner determines the demand of the stock for its given price range. Once the cost of the stock has been determined, then the issuing company can decide how to divide its stock at the determined price to its bidders.
Before Facebook's IPO, the book building process was used to determine how much the stock was worth before it was sold to the public. Morgan Stanley was the lead investor for Facebook's IPO. Initially, the stock was thought to be determined between $28 and $35 a share. The week before the stock was sold, the demand for the stock was sufficient to increase the price between $34 to $38 a share. Once the stock was offered, Morgan Stanley tried to prevent the stock from falling below $38 a share in order to prevent the IPO from being considered a failure. Since Facebook stock initially had a high demand, but this demand fell and its price consequently fell, it was considered that Facebook was overvalued when it was sold at its initial public offering.
By now, the looming dangers of climate change are clear to anyone who’s been paying attention, covered extensively in both academic literature and the popular press.
But what about solutions?
For all the hand-wringing on climate change over the years, discussion of solutions remains puzzlingly anemic and fractured. A few high-profile approaches, mainly around renewable energy and electric cars, dominate discussion and modeling. But there’s been no real way for ordinary people to get an understanding of what they can do and what impact it can have. There remains no single, comprehensive, reliable compendium of carbon-reduction solutions across sectors.
At least until now.
It seems Paul Hawken got tired of waiting.
Hawken is a legend in environmental circles. Since the early 1980s, he has been starting green businesses, writing books on ecological commerce (President Bill Clinton called Hawken’s Natural Capitalism one of the five most important books in the world), consulting with businesses and governments, speaking to civic groups, and collecting honorary doctorates (six so far).
A few years ago, he set out to pull together the careful coverage of solutions that had so long been lacking. With the help of a little funding, he and a team of several dozen research fellows set out to “map, measure, and model” the 100 most substantive solutions to climate change, using only peer-reviewed research.
The result, released in April 2016, is called Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming.
Unlike most popular books on climate change, it is not a polemic or a collection of anecdotes and exhortations. In fact, with the exception of a few thoughtful essays scattered throughout, it’s basically a reference book: a list of solutions, ranked by potential carbon impact, each with cost estimates and a short description. A set of scenarios show the cumulative potential.
It is fascinating, a powerful reminder of how narrow a set of solutions dominates the public’s attention. Alternatives range from farmland irrigation to heat pumps to ride-sharing.
The number one solution, in terms of potential impact? A combination of educating girls and family planning, which together could reduce 120 gigatons of CO2-equivalent by 2050 — more than on- and offshore wind power combined (99 GT).
Also sitting atop the list, with an impact that dwarfs any single energy source: refrigerant management. (Don’t hear much about that, do you? Here’s a great Brad Plumer piece on it.)
Both reduced food waste and plant-rich diets, on their own, beat solar farms and rooftop solar combined.
(Important note: The above comparisons are true in Drawdown’s central, “probable” scenario. There are also more ambitious scenarios, in which each solution is pushed to its full potential. In the “optimum” scenario, onshore wind rises to crush all competitors, reducing 139 GT. All scenarios use only existing, commercialized technologies, so they should be considered conservative. All the solutions, data, and references are available at drawdown.org.)
I spoke with Hawken over a beer when he passed through Seattle on his book tour. He told me the book is already in its third printing, confirming our mutual sense that the public is hungry for this kind of practical wisdom. An edited transcript of our conversation follows, with occasional editorial comments in [brackets].
For the record, explain the term “drawdown.”
Drawdown is the point in time when greenhouse gas concentrations peak in the atmosphere and begin to go down on a year-to-year basis.
[Drawdown’s “plausible” scenario does not reach drawdown. Its second, “drawdown” scenario does. Its third, “optimum” scenario, which maxes out all available technologies, accelerates drawdown.]
So all these models we see in the popular press, the ones that hit, for example, 80 percent carbon reductions by 2050 — none of those actually reach drawdown?
And not only that, they’re about energy — they’re all energy models. There’s an assumption that if you get 100 percent renewable [energy], you basically have a hall pass to the 22nd century. That’s simply not true. It’s a scientific howler. It’s extremely important that we [get to 100 percent renewables], but to put all of it on energy ...
[Drawdown has seven categories of solutions: energy, food, women and girls, buildings and cities, land use, transport, and materials. There’s also a “coming attractions” category of not-yet-commercialized technologies, but they are not included in the scenarios.]
How did the book get started?
I hadn’t thought about solutions much until I saw the wedges, in 2001.
[In 2001, scientists at Princeton’s Carbon Mitigation Initiative became famous for proposing a set of “climate stabilization wedges” — efficiency, wind, solar, etc. — to bring emissions down beneath global targets.]
I looked at those and said “whoa, whoa, whoa.” Two things are lacking.
The first is affordability and agency. They couldn’t be done by you and me, except drive less, maybe put a solar panel on our roof.
The second is that 11 of the 15 could only be done by big corporations — primarily energy utility and car companies — but they were so deeply underwater financially that it was not going to happen. It could happen now, but at that time it was not viable.
So ... now I am depressed. [laughter] The science was clear, but the solutions were just dramatically not.
And then when Bill [McKibben]’s piece came out in 2012, “Global Warming’s Terrifying New Math,” which is based on Mark Campanale’s work at Carbon Tracker, I had friends saying, “game over.”
And so I finally decided to do Drawdown: name the goal and then map, measure, and model, see if it’s achievable. And away we went, for almost three years, with 70 Drawdown research fellows from 22 countries and six continents.
We went in fairly confident about what the top solutions would be. We were wrong — which is validating, in a way. We have a methodology that forfends against bias.
One thing that jumps out is how different this list looks from what gets discussed most in the media -- wind, solar, CCS. Did you go in expecting your list to look more like conventional wisdom?
We thought at least the top of the list would — solar, wind, wind, solar. Because that’s what you hear from Charles Ferguson, Al Gore, [Jeffrey] Sachs, or Christiana Figueres. They’re all saying the same thing.
It’s understandable — 62 percent of the [greenhouse gas] molecules up there came from fossil fuel combustion, so you just invert it, right? It makes sense. It just doesn’t work out that way.
If you take solar, which is eight and 10 [on the list], and wind, which is two and 22, and you combine them, they are definitely near the top. But you can’t model on- and off-shore wind the same, because the economics are vastly different. And you can’t model rooftop and solar farms in the same model. So in some cases we broke things up that people think of as aggregated.
But even then, the number one solution is educating girls and family planning.
How do you put numbers on that?
We took the numbers from other agencies — from World Bank, WHO, IPCC. What they are is the delta between the median high population projections of the UN in 2050 and that reduction alone. There are so many ancillary benefits and impacts of 1.1 billion less people, though.
But it is the 1.1 billion fewer people that is doing the carbon work?
Are there other benign ways of influencing population growth that you considered?
There’s a lack of original science.
Every carbon number [in the book] is peer-reviewed data. We don’t use anecdotal data, or “we think,” or “we’re seeing.” Everything is peer reviewed. If there’s no peer-reviewed data, we can’t model it. And on the economic side, which is more difficult and gnarly, there’s no such thing as peer reviewed data in most cases.
We do lit reviews, tech reviews — we’ve got a couple thousand notes and three thousand references for the content.
We had a guy who’s presenting Drawdown to the [IPCC] Sixth Assessment, the Third Working Group. One of the scientists there took a poke at regenerative agriculture and said, “Well, that’s just climate smart agriculture [CSA], we know about that already.” I wrote back and said, “Show me the model.”
It’s a generality. It doesn’t mean anything. Multistrata agroforestry, fantastic, show me a model. Silvopasture — show me the science. In the process of covering land use, we had to identify what had actually been studied. So we have 22 land-use solutions. We’re splitters, in order to get accurate data.
If you had to guess, what’s the biggest potential contributor that you had to leave out for lack of data?
Because it reduces population?
No, no, no — just the footprint of maintaining standing armies and militaries around the world. It must be extraordinary.
Oh, the carbon benefit of…
Of peace. Yeah. There is one.
How big a role does carbon capture and sequestration (CCS) play in your schema?
None. It’s unaffordable. It doesn’t work. It has to work first, and then has to be affordable. Using carbon capture in Saskatchewan for depleted oil wells isn’t exactly a solution, especially when it’s only 40 percent capture and the company’s depending on the province to subsidize it. There are better results coming out of Texas. We’re watching it.
You can’t achieve drawdown unless you sequester [carbon], but right now the only way we know how to do it in a reliable way is photosynthesis. I mean, there are science experiments going on, but it’s not commercial and it’s not practical.
By the way, we’re doing D2 — Drawdown Two. And it’s all coming attractions that weren’t in D1 — 60 more of them, things that are nascent, on the horizon or just below the horizon. They are game-changers, a lot of them. Some of them will fail. It’s hard to say which will or won’t.
Give me an example.
Direct-air water capture — from low-humidity, not high humidity, environments. You get carbon capture in plant life where you couldn’t before. It could be agriculture, could be perennial, could be afforestation, could be a combination.
You have this effect of moisture just streaming over every Western landscape in the world, usually bypassing it. What could you do with that water?
You have three scenarios. The main one you call the “plausible scenario.”
We modeled the solutions, we scaled them in a rigorous but reasonable way, as they’re all scaling now, using other literature to predict. That’s the first scenario — we think that’s happening. But it does not achieve drawdown.
That’s just based on what’s currently happening, though?
And no new technology. Not one single new technology. That’s why we had the coming attractions; it’s unrealistic to think that this is our portfolio for the next 30 years. It’s not true. That’s why the next book is important — one out of five or six of these [future solutions] is really going to make a difference.
I guess what trips me up is that the scenario you’re calling “plausible” involves reductions in carbon that most modeling outfits would characterize as wildly ambitious.
Our models include a lot of things that were excluded from other models. One is land use. It’s given passing reference, but hasn’t been given much credibility by the IPCC.
They don’t include, for example, farmland restoration — over a billion hectares of abandoned land all over the world. We know how to regenerate that, using animals, using cover, using no-till. Is there a transition cost? Yeah. But it’s a big sink.
It is conventional wisdom that we don’t have any hope on climate change unless we get serious about it — go on war footing. That seems difficult to do without the US federal government.
First of all, let’s be honest: The US has never led in this area. Ever. When they’ve tried on an executive level, they’ve never been supported by Congress. States have led, cities have led, but never the federal government.
Now the federal government is what it is. When [Trump] was elected, I went over every one [of the Drawdown solutions]. I said, “What can the [US federal] government do?” And it really isn’t that much.
I don’t want to in any way whistle past the graveyard of the enormous damage and harm President Trump can do, in terms of security and war and suffering. It’s just that people in the United States think that they’re the leaders on this stuff. They’re not. It’s Germany, China, France, Denmark.
They’re not cueing off the Trump administration. The rest of the world doesn’t take him seriously on this stuff.