Comments on: The US IPO cartel http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: smokeygeo http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27552 Sun, 12 Jun 2011 00:51:28 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27552 some options for companies seeking capital might be:
– perform a “reverse tender offer” where unlike a takeover artist seeking control of a target company by asking people to tender their shares for a set price, they could register securities and go directly to the public through an auction process. If they want to sell X share respresting x% of their capital, get prospective buyers to submit bids

– or acquire a publicly traded company and do a reverse merger. Practically fee-free compared to an IPO. But doesn’t generate a lot of publicity.

Probably the companies are really after publicity more than the investment capital… so they can say “advised by Goldman Sachs” etc. etc.

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By: hsvkitty http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27491 Thu, 09 Jun 2011 18:28:44 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27491 Posted by KenG_CA:”There doesn’t have to be a written agreement for collusion to exist.”

Exactly. Collusion in the Madoff case, the mortgage securitization and MERS, and forclosuregate for 3 of thousands.

Posted by TinyOne: “Additionally, if you abolished the SEC and the registration process…”

That simplifying is how you get a MERS mess… so I doubt that would be the ticket to anything but more hell.

Thanks for asking hard questions Felix.

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By: TinyOne http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27484 Thu, 09 Jun 2011 16:46:44 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27484 Numerous smaller middle market banks are willing to bookrun deals at a lower underwriting spread. I’m going to go out on a limb and guess that Cowen isn’t going to be picked by Facebook to bookrun their IPO. The CEO’s and entrepreneurs of these Companies apparently see value in having a “brand” name bookrun the deals and are willing to pay a higher spread for the privilege.

Additionally, if you abolished the SEC and the registration process, and let Companies freely issue shares in a manner they saw fit, issuance costs would drop.

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By: Herb1 http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27455 Wed, 08 Jun 2011 18:02:03 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27455 Having worked at a bulge bracket IB and executed multiple equity transactions, this comes as no surprise. Firms will not compete on price. Full stop. Collusion isn’t limited to fees, banks coordinate the IPO calendar by sector to manage the supply of deals coming to the market. The underwriting process across all capital markets products represents an enormous profit pool for the banks, completely disproportionate to the actual risk taken in the execution. The bulge bracket firms collude to protect access to the IPO mkt and preserve fees. On the debt side, they collude to maintain pricing power. Fees are seeing as a payback for extending credit to issuers.

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By: Herb1 http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27454 Wed, 08 Jun 2011 18:01:56 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27454 Having worked at a bulge bracket IB and executed multiple equity transactions, this comes as no surprise. Firms will not compete on price. Full stop. Collusion isn’t limited to fees, banks coordinate the IPO calendar by sector to manage the supply of deals coming to the market. The underwriting process across all capital markets products represents an enormous profit pool for the banks, completely disproportionate to the actual risk taken in the execution. The bulge bracket firms collude to protect access to the IPO mkt and preserve fees. On the debt side, they collude to maintain pricing power. Fees are seeing as a payback for extending credit to issuers.

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By: cb22 http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27445 Wed, 08 Jun 2011 14:55:52 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27445 I think the key thing here is the difference headline fees and real fees. Having worked in this area (admittedly European debt not US equity markets) it was standard practice to quote a headline fee in the prospectus that higher than the one actually charged (ie part of the headline fee was rebated back to the client).

High headline fees are inevitably popular with the banks as they do not like to advertise discounts. It may be that this approach is simply more common in the US – not sure how/if the authors in the study adjusted for this.

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By: JR04 http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27443 Wed, 08 Jun 2011 13:46:19 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27443 Fascinating article — and very damning.

It reminds me very much of the real estate sales market. Realtors® charge 6% regardless of costs or conditions and they do not compete on price.

Recently, there have been a few cracks in the armor of real estate sales — low-commission realtors, limited-service, etc. But it’s not easy to break the 6% norm. The trick is that buyers care so much more about the ultimate price, which varies wildly — by much more than 6% or 7% — that realtors and banks doing IPOs can persuade their customers that they have more to lose by going to any emerging low-cost rival than they have to gain. Sure, your commission may be cut in half, but your price will be off by 10% or more. So why do it? (And that’s assuming there even _are_ low-cost rivals in the IPO market, which the chart suggests are very, very rare.)

These banks really are vampires, sucking blood from the rest of the economy. It is so disgusting.

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By: starwed http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27437 Wed, 08 Jun 2011 05:09:55 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27437 “True, the range is clearly greater for the European than for the US distribution; but there are so many more points in the European distribution that this can easily be misleading.”

You misunderstood that chart — the thing that appears to be a solid black line is in fact the 95% of US data points that are EXACTLY 7%.

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By: samadamsthedog http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27435 Wed, 08 Jun 2011 04:44:25 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27435 Let’s see now. The data for both the European and the US distributions appear to be homoskedatic in deal size — so that all the information to be had can be derived from the projections onto your Y (percentage) axis.

There can be little doubt that IPOs are more expensive in the US. But to say that the US has a cartel whereas Europe does not, you would have to sow that the US distribution is significantly narrower than the European distribution.

True, the range is clearly greater for the European than for the US distribution; but there are so many more points in the European distribution that this can easily be misleading. Eyeballing the plot, I think the US distribution has a raw std deviation of about 1% and the European distribution has a raw std deviation of about 1.5%. These should be readily computable. Applying a statistical test (probably some sort of Chi-Sq test), my guess is that you would not find the two distributions to differ significantly in variance, and that the hypothesis that the US has a cartel whereas Europe does not would therefore not be borne out.

It would, of course, remain to be explained why the US is a more expensive place to do an IPO than Europe is, but that’s a very different question, best answered by asking someone who id an IPO in the US, “Why did you do your IPO in the US, when it’s so much cheaper to do it in Europe.” My guess is that most of the answers would be, “Well, our VC has a long relationship with bank X and he felt very comfortable going with them.” Comfort is expensive, as anyone who has purchased an automobile is well aware.

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By: gwern http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/comment-page-1/#comment-27430 Wed, 08 Jun 2011 03:35:12 +0000 http://blogs.reuters.com/felix-salmon/?p=8579#comment-27430 Might be a good idea to add a caption explaining that that thick black line is *not* a best-fit curve or average line or something, but is the data itself.

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