What is a Western account?
A western account is a type of agreement between subscribers (AUA) in which each subscriber agrees to share responsibility for only a specific part of the whole new show. They are the opposite of a “eastern account“, in which each subscriber shares responsibility for the entire show.
Western accounts are popular with some underwriters because they reduce their effectiveness responsibility if the new show turns out to be more difficult than expected. On the other hand, Western narratives also limit the potential Upside down from which subscribers benefit in the event of unusual success of the new issue.
Key points to remember
- A western account is a type of AAU in which the parties to an underwriting syndicate agree to be responsible only for their own allocation of the new issue of securities.
- In contrast, the Eastern account structure requires that all parties share responsibility for the entire issue.
- In both cases, underwriters seek to profit from the spread between the price paid to the issuer and the price obtained from the investing public.
How Western Accounts Work
The western account is one of the means by which underwriters seek to manage the risk associated with offering new securities to the public, such as in the case of a initial public offering (IPO). These operations are inherently risky for the subscribers concerned, since they are required to pay a certain amount of money to the transmitter of the security regardless of the price at which these securities can then be sold to the public. The subscriber’s profit is based on the spread between the price paid to the issuer and the price finally obtained from the sale of the new securities to the public.
To mitigate this risk, underwriters typically make new issues in collaboration with each other, forming what is known as underwriting “consortia”. Of course, when it comes to combining several underwriting companies in this way, it is necessary to clearly delineate the rights and responsibilities of the parties involved. This is accomplished through explicit agreements known as UQAs, which define which underwriter is responsible for which part of the new issue.
The Western account, also known as the “split account,” is just one common example of an AUA structure. In it, each underwriter agrees to assume responsibility only for the part of the issue that he supports. inventory. If one of securities held by other underwriters fail to sell (or obtain underperforming prices), then that risk is borne only by the specific underwriter who still holds that inventory.
Sample Western Account
XYZ Corporation is a leading manufacturing company preparing for its IPO. Its management team is made up of experts in their industry, but does not particularly know the Financial markets. For this reason, they hire a lead underwriter who in turn forms a consortium of companies that are collectively responsible for bringing about the IPO of XYZ.
Pursuant to this transaction, XYZ receives an amount from the underwriters equal to $25 per share. In order to profit from the transaction, the underwriting consortium must seek to sell its shares to other investors for more than $25 per share.
In forming their consortium, XYZ underwriters adopted an AAU modeled after the Western account structure. As a result, each of the underwriting companies involved only assumed responsibility for a specific portion of the newly issued shares. For this reason, the ultimate profit or loss to underwriters will vary from company to company.