Introduction
An overnight bought deal is the most aggressive of the standard follow-on products: the underwriting bank purchases the entire offering at a fixed price after market close, then has overnight to redistribute the shares to institutional investors through an accelerated bookbuild before the next morning's open. The structure transfers all execution risk from the issuer to the bank in exchange for a wider discount, which is why it is the preferred product when speed and price certainty matter more than minimizing dilution. The format is dominant in Canada (where bought deals account for the bulk of follow-on volume) and is widely used in the US and Europe for time-sensitive primary issuance. Understanding the mechanics, the bank's risk-pricing process, the bake-off dynamics, and when the structure beats a marketed follow-on is core ECM knowledge.
The Bought-Deal Sequence
The overnight bought deal compresses the entire follow-on workflow into roughly fifteen hours.
Pre-Launch Bank Pitch
The bank approaches the issuer (or vice versa) with a bought-deal proposal: size, indicated price, and underwriting terms. Discussion can run hours to days before commitment.
Issuer Commitment (4:00pm)
Issuer accepts the bought-deal price and signs the underwriting agreement after market close. Bank now owns the offering at the agreed price.
Accelerated Bookbuild Launch (4:00-5:00pm)
Bank's syndicate desk announces the deal and begins calling institutional accounts on a wall-crossed basis to gather firm orders.
Order Book Builds (5:00pm-Midnight)
Sales coverage at the bank works through the institutional account list rapidly, taking firm commitments at the offering price. Book building is materially faster than a marketed follow-on.
Final Demand Confirmation (Midnight-1:00am)
Syndicate desk confirms the book is covered. If oversubscribed, the bank may upsize the deal. If undersubscribed at the agreed price, the bank holds the gap on its balance sheet.
Allocations Notified (Pre-Open)
Investors receive allocation confirmations before the next morning's market open.
New Shares Trade (Next Morning)
New shares trade alongside existing common stock when the market opens. Bank monitors trading and unwinds any residual position.
- Accelerated Bookbuild (ABB)
A method of placing equity in which the bookbuilding process is compressed into 1 to 2 days (sometimes a single overnight session) with minimal marketing. Investors are approached by the syndicate desk on a wall-crossed basis and legally binding commitments are received over the phone or chat. ABBs are the marketing mechanism inside an overnight bought deal: the bank uses the ABB to redistribute shares it has purchased from the issuer at the bought-deal price.
The Bank's Capital Commitment
The principal feature distinguishing a bought deal from a marketed follow-on is the bank's capital commitment.
The Firm Commitment
In a firm commitment, the bank purchases the entire offering from the issuer at the agreed price regardless of subsequent demand. If the bank cannot place the shares to investors at the offering price overnight, it holds the residual position on its balance sheet at the bank's expense. The structure transfers all execution risk from the issuer to the bank, which is why bought deals price at wider discounts than marketed follow-ons: the wider discount compensates the bank for the principal risk it is accepting.
- Firm Commitment Underwriting
A securities-offering structure where the underwriting bank purchases the entire offering from the issuer at a negotiated fixed price and assumes all distribution risk. If the bank cannot place all the shares at the offering price, it holds the residual on its balance sheet. Firm commitment is the default structure for bought deals and the principal differentiator from "best efforts" structures where the bank simply markets without committing capital.
The Internal Committee Approval Process
Before committing capital, the senior banker on the bought-deal team must obtain approval from the bank's commitment committee, which typically includes the global head of ECM, the head of equity trading, the bank's risk officer, and (for larger commitments) the firm's chief risk officer. The committee evaluates the issuer's stock-price stability, the institutional investor base's depth, the prevailing market environment, the offering size relative to typical daily trading volume, and any specific catalysts (pending earnings, regulatory events) that could disrupt overnight execution. Approval frequently requires the desk to articulate a specific hedging plan and a residual-position cap (the maximum size the bank will hold on the balance sheet if the book does not clear).
Hedging and When the Bank Loses
Banks executing bought deals typically hedge the principal risk through their own trading book, pre-positioning hedges in correlated names or structuring offsetting trades to manage the overnight exposure. The bank's overnight P&L on the principal position can be summarized as:
The hedging capability is one reason bulge brackets dominate the bought-deal market: smaller banks lack the trading infrastructure to manage the risk efficiently. When a bought deal fails to clear, the bank holds the residual position, sells into the open market at a lower price, or accepts the loss against the bought price. Risk officers track win-loss ratios, average residual sizes, and time-to-clear statistics; desks that consistently miss see capital allocation tightened until pricing discipline improves.
The Bake-Off Versus Sole-Source Decision
Issuers approach the bought-deal market in one of two ways, and the choice meaningfully affects pricing.
The Confidential Bake-Off
Most large bought deals are run as confidential bake-offs among two or three bulge brackets. The issuer (or the issuer's financial advisor) sends a confidential request-for-proposal to the selected banks specifying size, indicated discount range, and bid deadline. Banks return their best price within a tight window (typically 1 to 3 hours) and the issuer selects the winner. The bake-off extracts the tightest pricing the market will support but creates execution risk because the losing banks know the deal is happening and could leak information.
The Sole-Source Mandate
In a sole-source mandate, the issuer awards the bought deal to a specific bank (typically the IPO lead-left or the bank with the strongest current relationship) without competitive bidding. Sole-source deals price at modestly wider discounts than competitive bake-offs because the bank does not have the pricing pressure of competition, but the format reduces leak risk and rewards relationship investment. Sole-source mandates are common for sponsor-backed issuers where the IPO lead has built the institutional base and is the natural execution partner.
When Issuers Pick Each Approach
Bake-offs are common when the issuer wants to test pricing tightness with multiple competing banks. Sole-source mandates are common when the issuer values relationship continuity and wants to avoid leak risk. Sophisticated CFOs alternate between the two approaches across successive transactions to maintain competitive tension across the bank panel.
Variable Price Reoffer Structures
Some bought deals use a variable price reoffer (VPR) format rather than a flat firm bid.
A flat firm bid is a single price at which the bank commits to purchase the offering. A VPR sets a floor (the bank's worst-case purchase price) and a reoffer mechanism whereby the final price is set after the overnight bookbuild based on actual demand. If demand exceeds expectations, the issuer captures some upside through a higher transfer price; if demand falls short, the bank takes the offering at the floor. VPR shares upside between issuer and bank and produces tighter floor pricing than a flat firm bid, with the trade-off that the issuer accepts variable proceeds. VPR structures are increasingly common on larger or more volatile bought deals where banks are unwilling to commit to a flat firm bid but issuers still want some price-certainty protection.
When the Bought Deal Wins Versus the Marketed Follow-On
The choice between bought deal and marketed follow-on turns on several specific issuer-side trade-offs.
Speed and Certainty
Bought deals execute in 15-18 hours; marketed follow-ons execute in 2-4 days. Issuers facing time-sensitive situations (binary catalyst, competitive M&A bid, regulatory deadline) almost always favor bought deals despite the wider discount because the alternative is uncertainty about whether the marketed deal will clear in time.
Discount Differential
Bought deals typically price 1 to 3 percent wider than an equivalent marketed follow-on. The wider spread compensates the bank for principal risk and the compressed window. Issuers comfortable with marketing-window execution risk usually prefer the marketed format to capture the tighter pricing.
Issuer Profile
Bought deals work best for issuers with stable trading patterns, strong existing institutional bases, and offering sizes within 5 to 10 percent of trailing 30-day ADV. Issuers with stressed multiples, recent volatility, or larger sizes typically push the bank toward wider discounts that may make the marketed format more attractive despite the longer timeline.
| Dimension | Bought Deal | Marketed Follow-On |
|---|---|---|
| Execution time | 15-18 hours | 2-4 days |
| Bank capital commitment | Full (principal risk) | None (best efforts) |
| Typical discount to last sale | 4-8% | 2-7% |
| Issuer execution risk | Zero (bank takes the risk) | Real (deal could revise or pull) |
| Marketing intensity | Single-night accelerated bookbuild | Compressed roadshow with management |
| Best fit | Time-sensitive, smaller relative to ADV | Larger, stable issuer, broader marketing |
A bought-deal book that clears at the offering price closes the loop on the bank's overnight risk; the issuer captures speed and certainty in exchange for the wider discount the bank charged for taking on the principal exposure. The same firm-commitment muscle that powers a bought deal also serves a different purpose entirely on the secondary side, where the supply originates from a sponsor or insider rather than from the issuer. Block trades are next.
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