Wall St may have squeezed the IPO bubble too hard
By Brian Kelleher
NEW YORK, Dec 7 (Reuters) - The great initial public offering boom went bust a few months ago, but allegedly not before some Wall Street firms squeezed the bubble as hard as they could.
Investment banks pull in a big chunk of their revenues from two operations: helping companies to sell stock through initial public offerings and buying and selling stocks for big investors. U.S. regulators are reportedly investigating whether Wall Street illegally tied the two businesses together.
The Securities and Exchange Commission and the U.S. Attorney's office in New York are investigating whether some investment firms, including Credit Suisse First Boston, exploited their positions as IPO underwriters, according to Thursday's Wall Street Journal.
Authorities are looking into whether some firms forced big investors into paying unusually large commissions in exchange for shares of hot IPOs, the newspaper said.
The SEC invoked its longstanding rule of not commenting on any investigation, and the U.S. Attorney's office declined to comment on the matter.
Investment banks pocket around 7 percent of the amount of the offering as a fee for a medium-sized deal, according to studies by Florida University Finance Professor Jay Ritter and colleague Hsuan-Chi Chen. The soaring performances of IPOs during the end of 1999 and early 2000 propelled investment bank profits to record levels.
The IPO bubble has burst with the sharp decline in the Nasdaq stock market, which is down more than 45 percent since hitting a record high of 5,132.52 on March 10. In the fourth quarter so far, the number of companies that have gone public is less than half the number in each of this year's prior quarters, according to market research firm Thomson Financial Securities Data.
As IPO calendars dry up, investment bankers tearily wave goodbye to triple-digit first-day gains and fat fees. The reported investigation questions whether Wall Street pinched every penny they could to turn a profit while the fun lasted, but the fun is undeniably over.
But what is right and what is wrong? IPO experts say it is not always obvious where regulators draw the line.
"There is just so much going on" in the IPO market, said Reena Aggarwal, a finance professor at Georgetown University.
"What is incorrect to do and what is all right to do? It's just not clear," she said. "I don't think there are any specific guidelines from the SEC."
CSFB ASKED FOR ALLOCATION INFORMATION
Federal regulators have asked Credit Suisse First Boston, the U.S. investment banking arm of Swiss bank Credit Suisse Group Inc. <CSGZn.S>, for information regarding their IPO allocation process, the company said.
"We believe that our allocation considerations are consistent with those employed by others in the industry," CSFB said in a statement.
Ironically, CSFB ran a two-page advertisement in Thursday's Wall Street Journal boasting of its successful stock offering launches. A one-page advertisement that runs nationally costs between $90,000 and $155,000, depending on how often a company advertises in the newspaper, according to a spokesman for Dow Jones & Co. Inc.<DJ.N>, which owns the paper. Dow Jones does not discuss specific advertisements, he added.
CSFB put its name on the IPO map when it snagged high-tech dealmaker Frank Quattrone away from Deutsche Bank's Deutsche Morgan Grenfell unit in 1998. Some 100 Deutsche Bank employees followed Quattrone to CSFB, immediately making it a technology investment banking force.
The move was especially fortuitous as it came before the great IPO boom, which ran from the end of 1998 until the beginning of this year. Coveted by investors of all sizes, shares of tech companies going public would routinely notch double-digit gains on their first day of trading.
Credit Suisse was at the front of the movement, grabbing underwriting credits for some of the most lucrative offerings, despite competing with larger rivals like Goldman Sachs Group Inc. <GS.N> and Morgan Stanley Dean Witter & Co. <MWD.N> Its share of the IPO pie got bigger with the integration of U.S. investment bank Donaldson, Lufkin & Jenrette, which it agreed to buy this summer.
18:12 12-07-00 |
