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The real dope on underwriting

New statistical modeling shows that corporations are spreading the wealth more evenly than previously believed.

New statistical modeling shows that corporations are spreading the wealth more evenly than previously believed.

By Justin Schack
September 2001
Institutional Investor Magazine

Wall Street firms are utterly obsessed with the so-called league tables that rank them as underwriters against their peers. The more deal flow a firm handles in a particular product or sector, the more it can tout its prowess to corporate CFOs in hopes of winning still more business. Some firms frantically pursue low-margin business and slash fees just to boost their position in the rankings.

That's why analysts and others who follow the investment banking industry prefer to measure underwriters by the fees they earn rather than the aggregate size of the deals they bring to market. In many cases, fee rankings show that those firms doing the most business aren't necessarily making the most money.

But there's one big problem. Regulators don't require disclosure of fees for most mergers, "overnight" securities offerings that are done as block trades, and many private placements in the convertibles and high-yield-bond markets. Since they're not required to disclose fees, clients and firms usually don't.

Now financial data vendor Dealogic (formerly known as CommScan) has developed models that allow it to estimate fees when they are not disclosed, based on a historical analysis of similar transactions.

In equity underwriting (numbers for M&A and debt will be available later this fall), Dealogic's models show Goldman, Sachs & Co. as the top earner. Morgan Stanley - the top firm according to disclosed fees - drops to third, while Merrill Lynch & Co. remains second (see tables below). They all lost market share, while second-tier players such as Credit Suisse First Boston and Citigroup gained, closing the gap and making them look far more competitive with the top firms.

With stocks reeling, much equity financing now consists of overnight deals and private placements of convertible notes, for which fees are not typically disclosed. "There's been a lot of activity in those markets this year, and that's exactly what the models are designed to pick up," says Jody Drulard, managing director of analytics at Dealogic.

Complete data on fees is of particular interest these days. With business down for all firms, a number of challengers - those owned by big commecial banks - are making a run at the long-dominant Merrill-Goldman-Morgan Stanley group. Looking at what firms are paid will show who's really winning this war.

Because the fee earned by a firm is a pretty good proxy for how much work it did on a deal, companies might do well to evaluate underwriters by this standard. Just don't expect the banks themselves to start touting these numbers.

"The banks are loath to put out an ad saying, We earn more fees than anyone else," says Drulard. "It's not the kind of image they want to be projecting. But realistically, the best measure is who's earning the most fees."

How you slice it
Investment banks often stack up differently when ranked according to the fees they earn on transactions rather than the size of the deals they underwrite. But new models, calculated below for equity underwriting so far this year, show that the contest for those fees is tighter than assumed, particularly at the top of the list.

Ranked by amount offered

Market

Firm
($ millions)
share

Merrill Lynch & Co.
$26,821
18.00%

Goldman, Sachs & Co.
24,058
16.1

Morgan Stanley
22,934
15.4

Citigroup
21,423
14.3

Credit Suisse First Boston
19,820
13.3

Lehman Brothers
11,361
7.6

UBS Warburg
6,502
4.4

Bank of America Corp.
3,869
2.6

J.P. Morgan Chase & Co.
3,393
2.3

Deutsche Bank
1,853
1.2


By disclosed fees*

Market

Firm
($ millions)
share

Morgan Stanley
$747
17.80%

Merrill Lynch & Co.
743
17.7

Goldman, Sachs & Co.
728
17.3

Credit Suisse First Boston
491
11.7

Citigroup
486
11.6

Lehman Brothers
248
5.9

UBS Warburg
184
4.4

J.P. Morgan Chase & Co.
114
2.7

Bank of America Corp.
88
2.1

Deutsche Bank
62
1.5


By all fees**

Market

Firm
($ millions)
share

Goldman, Sachs & Co.
$810
16.80%

Merrill Lynch & Co.
798
16.5

Morgan Stanley
771
16

Credit Suisse First Boston
662
13.7

Citigroup
608
12.6

Lehman Brothers
287
5.9

UBS Warburg
215
4.4

Bank of America Corp.
135
2.8

J.P. Morgan Chase & Co.
118
2.4

Deutsche Bank
74
1.5

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