What does the term "bookbuilding" refer to in IPO processes?

Bookbuilding is a critical process in initial public offerings (IPOs) where underwriters gauge demand for the company's shares by soliciting interest from potential investors before the actual offering price is determined. During this phase, underwriters collect bids from institutional investors, which include the number of shares they wish to purchase and the price they are willing to pay. This information is crucial as it helps the company and its underwriters establish an optimal offering price that balances seller and buyer interests, taking into account the overall market conditions and investor demand.

This process is essential because it not only helps to set a price that reflects current market sentiment but also ensures that the number of shares offered is appropriate to meet demand without leaving too much on the table or creating oversupply. The resulting book provides valuable insights that inform final pricing decisions and ultimately affect the IPO's success in the market.