Investment banks fail to impress on IPOs

Facebook's IPO: what's not to like? (Eyepress News)

We asked our readers last week about the value that investment banks bring to clients pursuing initial public offerings. The results suggest that few of our readers rate the banks very highly.

This is not surprising in the wake of the epic fail of the Facebook IPO, which has been described by some commentators as the worst stock market debut in recent memory (though it surely wasn’t as big a disaster as the Bats IPO in March).

PICC clearly doesn’t think much of investment banks. The Chinese insurer hired 17 of them last week to handle its IPO — never mind the mixed messages, conflicts of interest or the sheer absurdity of it all. More banks means more chances to snag a few big cornerstone investors, and that’s all PICC seems to want from its bankers.

Bad press hasn’t helped. Goldman Sachs’s Muppetgate controversy contributed to a perception that big investment banks are far more likely to look after themselves than their clients — though a distinction should probably be drawn between trading counterparties (muppets) and investment banking clients (golden geese).

It’s safe to say that nobody at Morgan Stanley described Facebook as a muppet (at least not until after the deal was declared a flop).

Part of the problem lies in the difficulty of measuring a bank’s contribution. Indeed, even the banks seem to be confused about this, tending to use whichever metric puts them in the best light rather than any agreed measure of success.

A bank that is top of the league tables will happily sell this as a mark of the quality of its equity capital markets business, while its lower-ranked rivals will pick this apart in any number of ways. They will point to their own superior aftermarket performance, for example, or argue that they were more selective in bringing quality companies to market. Many will say that they don’t do deals simply for league table credit, implying that others do, or else they will simply argue that league tables are irrelevant.

During last year’s awards interviews, for example, several banks complained that one of their rivals had hired someone who was employed full-time to cajole the data providers into giving them more credit in the league tables. None of them convincingly denied doing the same thing themselves — the complaint seemed to be that this individual was uniquely effective.

It also doesn’t help that big IPOs in Asia tend to feature a long list of banks. The role that each one plays in the success or failure of a deal is far from transparent — and banks are happy to obfuscate further by minimising their contribution to bad deals and exaggerating their role on good ones.

The weather is another favourite topic. Deals completed in tough markets are almost always billed as a success, regardless of the pricing or aftermarket performance. “The most important thing was just to get the deal done,” bankers often argue, while denigrating successful deals that happened in buoyant markets: “That deal sold itself,” they complain.

Even secondary performance can be misleading. How much of a “pop” is too much? If a stock rises 20% on launch, was it priced too cheaply? Were investors ripped off if it didn’t pop at all?

Price support is a common bone of contention. It is either a valuable service to clients or the hallmark of a failed deal. Take your pick.

The final recourse is often to blame the client. Deals that go wrong are invariably caused by clients who either wouldn’t listen to their advisers or simply didn’t care about their investors. This is clearly a perception that has stalked the Facebook fiasco since the company upped the size and price range of its IPO — a move that would not be allowed in Hong Kong.

Facebook also introduced an excuse we have not heard much in Asia before: blaming the exchange. That worked for a day or so, but it is hard to argue that a fleeting computer glitch caused a two-week decline.

When it comes to judging the success of an IPO, beauty is in the eye of the beholder. Henry Blodget’s lengthy defence of the Facebook IPO is a particularly good example of this. (Blodget, for the record, is a former Merrill Lynch analyst who was banned from the securities industry after publicly recommending dot.com bubble stocks such as Excite, Infoseek and Lifeminders, while privately describing them in unflattering terms.)

Banks can of course add real value to companies that wish to go public, but there is no easy way for corporate executives to determine which bank will add the most value.

While bankers might complain about PICC’s list of 17 bookrunners, it’s hard to ignore the fact that those 17 banks have all put themselves forward, doubtless wielding PowerPoint decks that portray themselves as the best candidate, each based on a different assessment of what “best” means.

In short, it is hardly surprising that our readers doubt the value-add that investment banks bring to IPOs. Intense competition to win mandates, particularly in today’s market environment, makes it difficult to sort the wheat from the chaff — and some banks will even admit that. They just claim that it’s everyone else who is responsible for it.