Since when is an IPO a Wall Street loss leader?
General Motors’ looming share sale is turning Wall Street on its head. The restructured automaker could return to the public equity markets as soon as October, raising as much as $20 billion, according to Reuters. Investment bankers would normally be salivating at the prospect of handling such a bumper deal. But the fees are so low that winning the IPO mandate looks more like a loss leader for more lucrative business.
Usually it’s the other way round, with financiers raking in their biggest fees by taking firms public. The average take on U.S. IPOs since 2005 is 6.7 percent of the amount raised, according to Thomson Reuters data. Granted, they’re lower for mega-IPOs. But assuming GM sold $10 billion and paid the same 2.8 percent that Visa doled out on its $19.6 billion offering two years ago, the bankers would share $280 million.
As it stands, they’re looking at just $75 million. They could earn more than four times that charging the company 7 percent on a $5 billion loan — the rumored size of a credit facility GM is seeking — although the banks would be carrying the risk long-term and would, of course, have to set capital against it. And if GM chose to raise that amount in the bond markets, the bankers could earn around $100 million, assuming they could levy the 2 percent fee commonly charged to junk-rated companies.
What’s more, the low IPO fee leaves little room for error for GM’s underwriters, led by Morgan Stanley and JPMorgan. If GM’s debut is poorly received and they’re left holding stock they can’t sell, it won’t take much of a drop in the price for the banks to take a hit.
Of course, given that the U.S. government owns 60.5 percent of the Detroit automaker, GM’s share offering is really more of a privatization. Such deals, which were common in the 1990s when European governments sold industrial and financial assets, usually command lower fees than private deals. And in any event, having been bailed out by the taxpayer 18 months ago, quibbling over fees would be an unwise move for bankers.
What’s more, the bragging rights for participating in what looks set to be the United States’ second-largest primary stock sale ever are worth something. No bank wants to miss out on the deal that will make or break their ranking in the all-important league tables. Wall Street just needs to hope it is correct in thinking this topsy-turvy deal is a one-off.