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Sharing the wealth

Investment banks that once ran deals on their own are increasingly being nudged aside as clients reward commercial banks with lucrative underwriting assignments.

On July 16, shares of Freescale Semiconductor debuted on the New York Stock Exchange -- and Motorola, Freescale's parent company, made good on a three-year-old pledge to its biggest creditors, Citigroup and J.P. Morgan Chase & Co.

The two giant banks had never led an underwriting or advisory mandate for Motorola. Nonetheless, the company made them -- along with longtime lead investment bank Goldman, Sachs & Co. -- joint book runners on the Freescale deal, which at $1.58 billion is the third-largest IPO so far this year. Goldman likely would have had the Freescale deal all to itself if not for an agreement struck when Motorola fell on hard times in the summer of 2001. Before it could take out a $2 billion bridge loan from Goldman to help refinance $6.2 billion in maturing debt, Motorola needed Citi and J.P. Morgan to waive a net-worth covenant on a credit facility it held with them. The two banks agreed, and got Motorola to promise that they would share top billing with Goldman on the company's future investment banking deals.

Goldman isn't the only firm that has had to get used to sharing fees of late. It used to be rare for more than one bank to lead a transaction, and the one that "ran the books" took most of the fees. But as commercial banks muscle into more deals, and as all firms become less averse to joint book arrangements in a more competitive environment, the exception is fast becoming the norm.

"You've got big players with big balance sheets who want to show that they can be in the equities business," says Richard Strauss, who analyzes brokerage firm stocks at Deutsche Bank.

The ten investment banks that have reaped the most in stock underwriting fees this year derived on average only 36.5 percent of this revenue from deals in which they acted as sole book runners, according to New York research firm Dealogic. Of the 635 equity offerings this year through late July, 23.9 percent have featured multiple book runners, up dramatically from 5.7 percent five years ago.

Clearly, the battle between traditional investment banks and giant commercial banks that followed the passage of the deregulatory Gramm-Leach-Bliley Act of 1999, only to cool off amid a postbubble drought in deal activity, is heating up again. Revenue from the lucrative equity underwriting business is one key measure of who's winning and losing. (Fees are thought by many to be a better reflection of a bank's performance than sheer dollar volume of deals done.) So far this year old-line firms Morgan Stanley and Goldman continue to dominate, ranking first and second with $366 million and $321 million in estimated fees, respectively (see graph). But J.P. Morgan and Citi, historically laggards in the equity business, rank third and fourth, ahead of established powers like Merrill Lynch & Co. and Lehman Brothers.

Further analysis of these numbers suggests that commercial banks are making inroads by horning in on deals that others might once have handled by themselves. Citi, J.P. Morgan and Bank of America all derived less revenue from sole-book-run deals than the top-ten average of 36.5 percent. Goldman, conversely, still gets nearly half its fees from solo mandates, while Morgan Stanley comes in at 42 percent.

Whether commercial banks can grab a bigger piece of the pie could depend more on economic cycles than anything else. Big banks may find it easier to get stock deals in tough times than in prolong-ed expansions. "During a credit crunch," notes Strauss, "a bank is going to have more leverage to get equities busi- ness by using its balance sheet."

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