IPO view: Bankers grumble as United States bargains on fees

NEW YORK Wed Aug 10, 2011 3:39pm EDT

NEW YORK (Reuters) - The Treasury Department may be playing undertaker to the underwriter.

Talk to any investment banker and they will tell you how banks are barely making any money selling Treasury's shares in bailed-out companies like General Motors Co (GM.N) and American International Group Inc (AIG.N).

Underwriting fees on recent deals as the U.S. government sells out of companies it rescued during the financial crisis have reached an all-time low.

As the Treasury thinks about selling the billions worth of shares that remain, Wall Street bankers worry that they make even less on those deals than they did before.

"It gets to the point for some of these Wall Street firms where the equities divisions may say, 'Do I really care about this business? Because I'm not going to make any money," one banker said.

The standard formula for fees in a secondary offering is about half of what's paid in an initial public offering. But the base is already low in government deals.

AIG set the fees at 0.5 percent for its $8.7 billion offering in May. GM paid 0.75 percent for the common stock portion of its record-setting $23.1 billion IPO in November -- far below a typical fee of 2 percent to 3 percent for an offering of that size, according to Thomson Reuters data.

The fee on the planned IPO of Ally Financial, another bailed out firm, is 0.875 percent.

At 0.75 percent, underwriters earned $136 million in fees from the common stock portion of GM's IPO. Out of these proceeds, banks pay attorneys and internal staff, as well as roughly half of investor roadshow expenses such as hotels, meals and jets. That would likely still leave money on the table but not as much as bankers are used to.

"Government fees were going to be lower no matter what; the question was how much lower," said another investment banker who asked not to be identified.

"The GM IPO at 75 basis points was essentially uneconomic for the firms that spent all the time doing it, given how many man-hours went into it," the banker said. "But you do it because it's the government, and it's high-profile."

Deals of such magnitude don't come by often, the average size of U.S. IPOs is just over $310 million this year, so being on them also means a bump up in league tables, the adviser rankings that give banks marketing ammunition to court clients.

It's a reality not lost on the Treasury Department.

"As much as they hate to do deals for 50 basis points, they need league tables," said a person familiar with the Treasury's thinking.

HARD SELL

There are no signs that large private issuers have taken the cue from the government in seeking lower fees.

U.S. IPO fees have remained stable at 5 percent to 7 percent in the last 10 years, compared to 2.5 percent to 4 percent in Europe and 2.5 percent to 6 percent in China, according to Freeman & Co. Jumbo equity deals pay a lower fee than average.

When Treasury interviewed bankers to lead GM's IPO in May of last year, Goldman Sachs Group Inc (GS.N), offered to do the deal for 0.75 percent, while others suggested 2 percent to 2.5 percent.

Treasury officials, who picked Morgan Stanley (MS.N) and JPMorgan Chase (JPM.N) as lead underwriters, used the Goldman bid to get the bank's rival to offer lower fees for the work.

"There have been lots of big deals throughout history and no one has pulled the low fee card," the second banker said. "Yes, Goldman Sachs pushed fee down (in GM's IPO), but they didn't get the lead role for doing that."

One factor that may go in the favor of banks this time could be the challenges facing GM and AIG, which makes both companies a harder sell to investors.

GM's shares, which have mostly traded below the IPO price of $33, are trading at less than $25 amid global market upheaval. AIG has fared no better, with the stock around $23 after being stuck in the $29 per share range for months.

Before the IPO, GM was touted as a restructured company, but nine months later, the automaker faces various problems.

AIG has had a tough year too, boosting its reserves for asbestos and environmental claims. Its property-casualty insurance unit Chartis has been stung by natural disasters around the world.

"Treasury will use all of the pressure to bring the fee down, but you know it depends on how difficult the offering is," a third investment banker said.

(Additional reporting by Clare Baldwin. Editing by Paritosh Bansal and Robert MacMillan)

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Comments (14)
breezinthru wrote:
0.5% of 8.7 billion USD is “barely making any money”!?!

4,350,000,000.00 USD is barely making any money? There is something desperately wrong about what is going on Wall Street. Wall Street’s warped sense of entitlement is in large part what caused the 2008 Collapse. The money in question belongs to the American public who were so kind as to bail out the banks and other industries that collapsed.

They think they are entitled to amount greater than that obscene amount of money by a factor of 6 to 8?

Those bastards should be handling these transactions gratis out of appreciation for the generosity shown them by the American citizens. They should handle those transactions gratis out of appreciation of not having been prosecuted by RICO, of not being stripped of the entirety of their assets and of not being imprisoned for the remainder of their greedy little lives.

They should be anxious to make sure every last possible penny is returned to the Treasury Department!

Wall Street needs a few laws to bring their runaway avarice under control.

Aug 10, 2011 12:19am EDT  --  Report as abuse
AllForLight wrote:
“”It gets to the point for some of these Wall Street firms where the equities divisions may say, ‘Do I really care about this business? Because I’m not going to make any money,” one banker said.”

waaahhhh! Oh, please stop! I’ll start bawling my eyes out any minute. Now I’m to stay awake nights just fretting my little heart out over whether or not you can enjoy that corporate jet with its tax breaks and your Beemer and your country club membership without ever more profits, all of which would be impossible had I and my fellow working Americans not bailed your sorry ass out of the deep hole you dug for yourself with your runaway greed. But that business is clearly not worth it to you, so just stop doing it, you greedy, perverted, unappreciative, unpatriotic, self-centered, self-important, self-indulgent bastards.

Aug 11, 2011 8:09am EDT  --  Report as abuse
bobw111 wrote:
I believe you’ve got your decimal point in the wrong place. I come up with $43,500,000.

Barely enough to pay 6 months of the CEOs salary and bonus, with nothing left over for a bribe… sorry, contribution, to their favorite politician.

No wonder their complaining! It took big bucks to buy off Dodd, Frank, and all the rest of their congressional buddies, and now their not even getting a decent return on their investment…

Aug 11, 2011 8:20am EDT  --  Report as abuse
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