What it means
In a conventional offering the bank acts as an agent, gauging demand and setting a price before committing to anything. In a bought deal the bank takes principal risk: it signs to purchase the whole issue, and whatever it cannot place with investors stays on its own balance sheet.
That risk transfer is precisely what the issuer is paying for. A company can approach a bank in the evening, agree a bought deal overnight and announce a completed financing before the market opens, which is invaluable when funds are needed to close an acquisition or when a market window looks likely to shut.
The price is the trade-off. Because the bank is absorbing the risk of a falling market and unsold stock, it demands a discount to the current trading price, commonly in the region of 3% to 8% for equity, and that discount is a real cost borne by existing shareholders through dilution.
Bought deals are most common in markets and jurisdictions where a company can issue quickly off an existing shelf registration, and they favour issuers that are already well known to institutional investors. A business with a thin shareholder register and little research coverage will struggle to interest a bank in taking that risk at any sensible price.
The structure occasionally goes badly for the bank. If sentiment turns between signing and distribution, the underwriter can be left holding stock it must sell at a loss, which is why bought deals are usually executed and distributed within a single day.
In practice
Real-world examples.
Example
A mining company signs an agreement to acquire a neighbouring deposit and needs $80,000,000 within 48 hours. It agrees a bought deal at a 5% discount rather than running a two-week marketed offering, accepting the lower price for the certainty.
Example
A property trust sees strong markets and an attractive acquisition pipeline. It takes an unsolicited bought deal proposal from its house bank, raising $150,000,000 overnight before quarterly results introduce uncertainty.
Example
An investment bank agrees a bought deal for a mid-cap technology issuer, then a sector rival warns on profits the next morning. The bank places only 60% of the block at the intended price and carries the remainder for three weeks at a loss.
Formula
Calculation
Proceeds to issuer = number of securities x price paid by the underwriter
Underwriter gross spread = (resale price - purchase price) x number of securities
Discount to market = (market price - purchase price) / market price
A listed company needs money quickly and agrees a bought deal for 5,000,000 shares. The shares closed at $20.00, and the bank agrees to buy the whole block at $18.80.
The discount is ($20.00 - $18.80) / $20.00 = $1.20 / $20.00 = 6%, and the issuer receives 5,000,000 x $18.80 = $94,000,000 with certainty, regardless of what happens next.
If the bank places the entire block with institutions at $19.60, it collects 5,000,000 x $19.60 = $98,000,000, giving a gross spread of $98,000,000 - $94,000,000 = $4,000,000. If instead demand disappoints and it can only clear the stock at $18.20, it loses 5,000,000 x ($18.80 - $18.20) = 5,000,000 x $0.60 = $3,000,000, and the issuer still keeps its $94,000,000.Case study
Seen in the real world.
Cedar Point Renewables is a fictional company used purely for this illustrative example. It had a wind portfolio under exclusivity with a firm deadline and needed $94,000,000 of equity within a week, while its shares traded at $20.00 and it had 30,000,000 shares outstanding.
Two routes were available. A fully marketed offering might have priced nearer $19.40 but would have taken two to three weeks and carried real completion risk, whereas a bought deal at $18.80 was available immediately with funds guaranteed. The board calculated that the extra $0.60 per share amounted to roughly $3,000,000 of forgone proceeds across 5,000,000 shares.
Against that, losing the acquisition would have cost far more than $3,000,000 in expected value, so Cedar Point took the bought deal. The bank distributed the block within a day at $19.55 and made a healthy spread. In this illustrative case both sides did well, but the board's minutes recorded the point clearly: they had bought certainty, and certainty is never free.
Watch out
Common mistakes.
- Assuming a bought deal is cheaper because it is quicker. It is almost always priced at a wider discount than a marketed deal, so speed and certainty are paid for through the issue price.
- Ignoring the dilution to existing shareholders. Issuing 5,000,000 new shares into a 30,000,000 share base reduces every existing holder's stake by roughly 14% before any use of the proceeds is considered.
- Believing every issuer can obtain one. Banks offer bought deals mainly to liquid, well-followed companies whose stock they are confident of placing within hours.
Questions
People also ask.
Who bears the risk in a bought deal?
The underwriting bank does, because it owns the securities from the moment the agreement is signed and absorbs any loss if they cannot be resold at the intended price.
How fast can a bought deal be completed?
Frequently overnight, with the agreement signed after market close and distribution finished before or shortly after the next open.
Does a bought deal require a prospectus?
Typically the issuer relies on an existing shelf registration or short-form document, which is exactly what makes the speed of the structure possible.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related