FSA’s Concerns about Competitive IPOs
The Financial Services Authority of the United Kingdom has expressed its concerns about competitive Initial Public Offerings. It was in fact so worried about them that it highlighted them in a supplement to its quarterly newsletter List!. The FSA wrote that “we felt we needed to tell the market about [these issues] immediately, rather than waiting until our next full edition”.
The FSA expressed its concern about the new form of conducting Initial Public Offerings as follows.
“In a standard IPO, the lead manager and other brokers involved in the IPO are appointed at a very early stage of the process, forming a syndicate of brokers. Under competitive IPOs, the syndicate members, their roles and remuneration are not defined until late on in the process. This maintains competitive pressure on the potential syndicate members as not all the firms involved in the competitive IPO process will be appointed to the syndicate after the initial ‘beauty parade’. In a standard IPO, the lead manager and other brokers involved in the IPO are appointed at a very early stage of the process, forming a syndicate of brokers. Under competitive IPOs, the syndicate members, their roles and remuneration are not defined until late on in the process. This maintains competitive pressure on the potential syndicate members as not all the firms involved in the competitive IPO process will be appointed to the syndicate after the initial ‘beauty parade’.. This may create ‘pressure points’ and new conflicts of interest — particularly around the preparation of pre-deal research and pre-marketing activities. We understand that one of the reasons issuers favour competitive IPOs is that it gives them greater control over the IPO process and greater leverage over the firms involved.
In a competitive IPO the issuer may be able to exert pressure on the competing firms, directly or indirectly, to produce research that is favourable or which justifies a higher valuation range. This is because firms could be providing their draft research to the issuer in circumstances where the firm is still trying to win a role in the syndicate. In a competitive market, firms may find it difficult to resist such pressure. Even where individual firms have some reservations about the process, they may feel compelled to participate so they are not excluded from transactions.”
This concern of the FSA appears quite strange to me. It suggests that regulators have not learnt the right lessons from the IPO scandals that took place during the dot com boom in the United States. Those scandals showed that the investment banks were not trying to get the best possible price for the shares in the IPO. Competition between investment banks was of the non price variety. Worse, in some cases, it took the form of allotting hot stocks of other underpriced IPOs to the CEO and other key decision makers in an attempt to win the IPO mandate. An IPO process that increases competition on the basis of price is a move in the right direction.
Regulators however continue to act as if anything unfamiliar is worse than the status quo even when it is potentially better. The US SEC did the same when Google decided to auction shares instead of doing a normal IPO. The risk factors that the SEC forced Google to incorporate in its offer document showed that the SEC too had not learnt any lessons from the IPO scandals that took place under its own watch.
Posted at 12:49 pm IST on Thu, 24 Nov 2005 permanent link
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