Fee fall

There seems to be no end to the gloom and doom on Wall Street. Grim markets, corporate scandals, few deals -- all have taken their toll. It gets worse: Fees on high-margin equity deals appear to be sliding, too.

According to data compiled by Thomson Financial Services, average spreads for initial public offerings fell from 5.6 percent in 2000 to 5.2 percent in 2002 and the early part of this year. As recently as 1996 the average was above 7 percent. Follow-on offerings are tracing the same sorry trajectory: In 1996 the average fee for a follow-on exceeded 5 percent; in 2000 it dropped to 3.6 percent; and in 2002 it declined to 3.4 percent, slightly below its level earlier this year. (Using the Thomson Financial data, Institutional Investor calculated weighted averages based on the number of transactions per firm and industrywide.)

The drop-off is attributed to a variety of factors: heightened investment bank competition for transactions, a paucity of the small-cap IPOs that generate the highest fees, an increase in bought deals in which only one firm collects a fee and corporate belt-tightening.

Glum news, but the fee decline should be kept in context, says Brad Hintz, securities analyst for Sanford C. Bernstein & Co. Fees aren’t collapsing the way they did in the bond market two decades ago after the Securities and Exchange Commission imposed Rule 415, which streamlined registration procedures and allowed issuers to designate huge amounts of securities as available for sale. These shelf registrations encouraged fierce Wall Street price competition and led to the collapse of debt underwriting spreads.

Nothing that dramatic is occurring in equities, says Hintz, who reviewed the data. He also points out that the mean fee level, as opposed to the averages, has actually remained fairly constant -- near 7 percent over the past few years.

The nature of the IPO market has changed since the bull market, and that has affected average fees. “In 1999 and 2000 there were a lot of small-cap IPOs where the fee was 7 percent,” says Carlos Hernandez, head of J.P. Morgan Chase & Co.'s Americas equities business. “In the past 24 months, there have not been a lot of small-cap deals.” (Fees are 5.25 percent on deals of $500 million to $1 billion but only about 3 percent on deals of $2 billion to $3 billion.)

Sponsored

The Role of Gold in Turbulent Times

Sponsored by CME Group

April 22, 2024

Another significant change in the market is the increasing prevalence of the bought deal, or block trade. Although buying and reselling shares is risky for an investment bank, it produces a lower average gross spread, because only one institution is involved. As a result, the fee might be 2.5 percent for the transaction, compared with the 5 percent total for a more conventional underwriting with two book runners.

Hintz says that more private equity sponsors are also selling IPOs these days, and they tend to be more sophisticated deal negotiators than, say, “a biotech company that doesn’t know beans” about equity issues.

Still, fee compression couldn’t come at a worse time for Wall Street. Deal volume has fallen off a cliff. Through mid-March Wall Street made a meager $236.9 million on 49 U.S. follow-on offerings worth a combined $9 billion and just $35.3 million on five IPOs, according to Thomson Financial. That’s a far cry from the $498.4 million in fees that the Street raked in on 105 follow-on offerings and the $171.3 million it made on 14 IPOs during the same period in 2002. Not even a rebound in fees can narrow that gap.