Bookbuilding
Bookbuilding is a procedure used by companies to determine the issue price of their shares before their IPO. Banks collect binding purchase offers from investors and use them to derive what the share is actually worth.
When a company offers shares on the stock exchange for the first time, it faces a simple but tricky question: How much is a share worth? Bookbuilding is the procedure that answers this question — not through estimation, but through real purchase offers. Banks accompanying the IPO ask large investors such as funds or insurance companies how many shares they would buy and at what price. These offers produce a picture of actual demand. In the end, the bank and the company jointly set an issue price based on this demand.
Pricing without bookbuilding
In the past, share prices at an IPO were often simply set — a company or its bank would estimate a value and hope that buyers saw it the same way. This regularly went wrong. If the price was too high, shares remained unsold. If it was too low, the company gave away money it could have earned.
Bookbuilding solves this problem by letting the market speak for itself. Investor demand is no longer a theoretical estimate but a measurable signal. This reduces the risk on both sides: the company gets a fair price, and investors know that the price is not arbitrary.
How the procedure works
First, the accompanying bank sets a price range, for example 18 to 22 euros per share. This range is no secret — it is published so that potential buyers know within which range to think. Then the actual bookbuilding phase begins, which usually lasts one to two weeks. During this time, investors can submit their bids: they state how many shares they want and at what price.
The bank enters all bids into an order book — hence the alternative name “order book procedure.” In the end, you can see exactly how many shares are demanded at which price. If demand is significantly higher than supply, the issue price can land at the upper end of the range. If demand is weak, it tends toward the lower end. In rare cases, the range is even shifted afterward.
Important: investors' bids are not binding during the bidding period. Only once the final price is set are the orders allocated. If the share is oversubscribed — meaning there are more bids than available shares —, not every investor gets as many shares as they wanted. The bank then takes over the allocation, often favoring investors who intend to hold for the long term.
Bookbuilding in practice
Nearly every major IPO worldwide today follows the bookbuilding procedure. In Germany, Deutsche Telekom’s 1996 IPO was an early example; since then, the procedure has become standard. Internationally, the multi-billion-dollar IPOs of companies like Alibaba (2014) or Porsche (2022) are well-known applications.
In the financial press, the term mainly appears when a company announces its IPO. Reports such as “The price range has been set at 40 to 45 euros” or “The share is five times oversubscribed” directly describe results of the bookbuilding process. Anyone who understands such news can gauge how strong interest in the respective company really is.
Bookbuilding is also a barometer of the general stock market climate. In good times, IPOs are multiple times oversubscribed, price ranges are shifted upward, and companies raise more money than planned. In uncertain phases, however, IPOs are postponed or canceled — precisely when the bookbuilding phase shows that demand is too low.