Definition§
An undivided account, often referred to as an “eastern account,” is a type of arrangement used during an initial public offering (IPO) where multiple underwriters work together to sell shares. In this setup, each underwriter is collectively responsible for placing any shares that remain unsold, effectively sharing the burden of unsold inventory among all parties involved. A primary characteristic of this structure is that risks and potential rewards are pooled, leading to a greater shared liability for all underwriters.
Undivided Account vs. Western Account Comparison§
| Feature | Undivided Account (Eastern Account) | Western Account |
|---|---|---|
| Responsibility | Collective responsibility for all sold shares | Individual responsibility for only allocated shares |
| Risk | Higher risk, as each underwriter covers unsold shares | Lower risk, as each underwriter only covers their part |
| Profit Sharing | Profits or losses are shared among all underwriters | Each underwriter keeps the profits from their portion |
| Common Practice | Most common arrangement in syndicates for IPOs | Less common, used in specific situations |
Related Terms§
Underwriter§
A financial institution that manages the IPO process, from determining the share price to facilitating the sale.
Syndicate§
A group of underwriters who come together to facilitate the offering of shares in an IPO.
IPO (Initial Public Offering)§
The first time a company offers its shares to the public and gets listed on a stock exchange.
Formula for Share Distribution§
While there isn’t a specific formula for undivided accounts since it involves collaborative effort, the distribution can be seen as:
Humorous Insights§
- “Why did the underwriter bring a ladder to the IPO? Because they wanted to reach new heights in profit sharing!” 😄
- Fact Reveal: The term “eastern account” is actually from companies “east” of Wall Street… just kidding – we think!
FAQs§
What is the main difference between an undivided account and a western account?§
An undivided account entails collective responsibility for unsold shares, while each underwriter in a western account is only accountable for the shares they’ve committed to sell.
Why do underwriters prefer undivided accounts?§
They share the burden and risk, making it less daunting to participate in larger IPOs while being able to capitalize on potential profits.
Can you calculate the total profit made by underwriters in a syndicate?§
Yes, add total profits from shares sold, accounting for shares remaining unsold, then factor in collective adjustments and individual shares’ performance.
Are eastern accounts more common than western accounts?§
Yes, eastern accounts are generally more common because they allow underwriters to work together efficiently and reduce individual risk.
What happens if an underwriter fails to sell their allocation in a western account?§
The risk is limited to the underwriter’s allocation, and they simply retain unsold shares unless they can negotiate for relieve or a re-bid.
Recommended Reading Resources§
- Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions by Joshua Rosenbaum & Joshua Pearl
- The Intelligent Investor by Benjamin Graham
- Investopedia - Initial Public Offering (IPO)
- Corporate Finance Institute - Underwriting
Test Your Knowledge: Undivided Account Challenge Quiz§
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Thank you for exploring the fascinating world of financial terms! May your understanding of undivided accounts spark joy in your investing endeavors! 🎉💼
