When Google went public in 2004, the initial public offering was conducted as an Internet-based Dutch auction, an approach widely seen as disempowering investment banks. A case before the U.S. Supreme Court in which the very existence of underwriting syndicates is alleged to violate antitrust law would seem to pose an even greater threat to the investment-banking status quo. And a recent survey by Financial Executives International revealed widespread dissatisfaction, with three out of four respondents complaining of a lack of competition in underwriting corporate securities.
But despite new technological options, legal challenges, and griping on the part of key stakeholders, the only notable change in the world of underwriting is that the big players are getting bigger. Through the end of the second quarter, a mere 10 firms accounted for fully 82.4 percent of market share for “book runners” (the banks that lead an offering). The top 5 firms controlled about half the market, and just 2 companies — Goldman Sachs, which did 14 deals worth $4.4 billion in the first half of the year, and Citigroup, which did 12 deals worth $3.6 billion — did more IPO business than the bottom 90 percent of the industry combined.
If that consolidation of power threatens competition, few CFOs seem bothered by the prospect. While most of the 261 senior finance executives who responded to a CFO survey on banking said they expect to see viable alternatives to traditional underwriters emerge in the next five years, only 14 percent have explored such alternatives during the past three years.
Indeed, there are few clues as to what such alternatives would even look like. Despite the success of Google’s Dutch auction, few companies have followed that example. And even relatively small companies that have gone public recently report that their needs have been met — with a vengeance.
“A few days after my initial S-1 filing in February,” says Ed Morgan, CFO of Tennessee-based Delek US Holdings Inc., “I was inundated with calls and letters from firms that wanted to get involved in the offering. It was overwhelming.”
Delek, which owns a Texas oil refinery as well as a string of nearly 400 convenience stores throughout the Southeast, generates about 60 percent of its revenue from its oil-and-gas business and 40 percent from its retail operations. Therefore it wanted a mix of investment banks that would give it solid representation among investors in both sectors, and says it had little trouble getting exactly that. The company was taken public in May by Lehman Brothers and Citigroup Global Markets, with William Blair, Credit Suisse Securities, HSBC Securities, Morgan Keegan, SunTrust Capital Markets, and Israel Discount Bank Capital acting as co-managers. “We had quite a few people who wanted a much larger role than they actually played, and we turned away another four or five banks, including some pretty large names,” says Morgan.
Dave Smeltzer, CFO of Aqua America, a publicly traded utility firm based in Bryn Mawr, Pennsylvania, tells a similar story, noting that while his firm may not be large enough to attract the attention of the biggest investment banks, “that gives us more flexibility” to use companies including Edward Jones, A.G. Edwards, and Janney Montgomery Scott, which, as he notes, “are not in the top tier.”