Cybersyndication: The art of the (automated) deal

As computers take over Wall Street, automating everything from investment decisions to trading strategies, one corner of finance has remained largely untouched: investment banking. Because it is highly relationship-driven, banking is less suited to automation. But one critical function performed by investment bankers -- managing new securities offerings -- is increasingly being handled by sophisticated software.

Statistics aren't available to show what percentage of transactions has been automated, but investment banks have increased spending on systems used for syndicating offerings by an average of 14 percent a year since 1999, according to research firm Tower Group. Bankers say that most stock and bond offerings today rely at least in part on software to be executed.

These systems, some developed by third-party vendors and others built in-house, automate several aspects of the offering process. They allow investors to file electronically indications of interest, which are then aggregated to build the book of orders that helps bankers and the issuing company decide on the proper size and price for a deal. The same technology allocates securities to investors and sends reports confirming their purchases. Some systems also let banks and companies manage investor road shows, in which deals are previewed to build interest in advance of pricing.

Before such software became widely used, firms relied on teams of bankers making phone calls to solicit interest from investors and to input bids manually on spreadsheets. Automation allows deals to come together more quickly and efficiently, with less chance for errors.

"It's impossible to do this business without this automation," says Tim Gould, head of U.S. equity syndicate at Lehman Brothers. He adds that the technology helps banks monitor which institutions participate in road shows. That's often taken into consideration by banks when allocating new issues.

Automation is especially helpful on big, complex transactions that span borders. Take, for example, October's record $21 billion IPO of Industrial and Commercial Bank of China. ICBC listed simultaneously in Hong Kong and Shanghai, and Merrill Lynch & Co. coordinated the global offering with four other book runners around the world, using an automated system provided by technology vendor Ipreo.

"It worked well," says Ira Lehrman, Merrill's chief technology officer for global investment banking, who notes that managing such an offering manually would have been impossible. "It was able to tie together the book on a global basis."

The systems also connect issuers to the offering process, allowing them to monitor deals in real time. "Issuer demands center around transparency and knowing the information right away," says Tower Group analyst Stephen Bruel. "That does drive a lot of [underwriting] business."

The dominant third-party vendors of syndication systems are Dealogic, a British company also known for its data services, and Ipreo, which was formed in December by the merger of business data provider Hemscott Group with I-Deal, a five-year-old joint venture of Citigroup, Merrill, Microsoft Corp. and Thomson Financial that offers syndication software. Dealogic counts white-shoe firms Goldman, Sachs & Co. and Morgan Stanley among its clients. (Institutional Investor is a joint venture partner with Dealogic on certain data products, but not the deal software.) Ipreo's customers include Citi, Merrill, Lehman Brothers and Wachovia Corp. Both companies offer similar suites of products that can talk with each other in the event that firms using the different platforms are working on a deal together.

A third player, London-based Marketpipe (which was acquired last month by Ipreo), is making some headway on European bond deals with IssueNet. That platform operates only in Europe, where it was used to manage $350 billion in bond offerings during the first 11 months of 2006, a little more than one third of the $958 billion in European corporate bonds sold during that period. In 2005, IssueNet was used on deals totaling $200 billion.

The next step for banks is to automate complex products such as collateralized debt obligations, index-linked notes and other derivatives. Dealogic and Ipreo both say their systems can handle such products, and banks are evaluating whether to take the plunge.

"At Merrill our goal is to take it across all products," says CTO Lehrman.