Goldman tells panel that cos wanted low IPO prices
By Jake Keaveny
NEW YORK, Dec 24 (Reuters) - Wall Street luminaries, grappling with how best to address abuses in the IPO market have come across a sticking point -- companies, not bankers, often wanted to low-ball their IPOs.
At a closed meeting two weeks ago with an IPO review committee requested by the Securities and Exchange Commission, Vice Chairman Robert Steel of Goldman Sachs Group Inc. <GS.N> and former Goldman partner Eric Dobkin pushed the point that some clients requested their initial public offerings be priced to double or triple on the first day of trading.
Goldman said that the companies wanted to mimic debuts by other hot IPOs, according to a person in attendance.
A strong stock opening could help a company launch bigger secondary stock sales in the future. But companies have more commonly said they were victims from underpricing because they raised less proceeds.
Goldman's presentation underscores the complex issues the committee faces midway through its mandate to help fix the IPO market. Reports from such blue-ribbon committees often carry little weight, but the SEC and other regulators say they are leaning on the committee for the next level of reforms.
In an industrywide settlement last week, the SEC and the New York Attorney General's office slapped new restrictions on banks. They included a ban on researchers attending investment banking pitches to clients, and prohibition of allocations of IPO shares to the top executives of potential clients.
But many of the thornier issues are still on the table -- like allocations made to hedge funds and models for pricing stocks. The New York Stock Exchange and National Association of Securities Dealers have asked for a recommendations from the committee by late March.
Wall Street critics argue that underpricing created the incentives behind alleged Wall Street abuses. "Spinning" -- doling out shares in hot IPOs in exchange for investment banking business -- and "laddering" -- forcing investors to buy shares in the aftermarket in order to get access to hot IPOs, which in turn boosted banks' trading revenue -- were driven by the ability to make big profits in the aftermarket.
Wall Street insiders counter that the problem was market euphoria, not the pricing system. The alternative would have been to boost the offer price, although most of the technology startups are now either defunct or trading at fractions of their IPO price.
Goldman Sachs spokeswoman Kathleen Baum wouldn't comment about specific meetings, but said "we were always clear that pricing for a market pop doesn't help the issuer or the market."
The committee also heard presentations by finance company CIT Group <CIT.N>, which launched a $4.6 billion IPO in July that was managed by Goldman Sachs. George Needham, chief executive of investment bank Needham & Co., also spoke about the IPO market.
OTHER CONFLICTS
Another issue could be whether new restrictions placed on the allocation of IPO shares to the executives of potential clients fall short of eliminating other potential conflicts of interest, said one person involved with the committee.
Partners in venture capital and private equity funds that back new companies, for example, often influence which investment banks are selected, though thus far there has been no discussion of limiting allocations to such investors.
There's also concern about the manner in which shares are allocated to hedge funds, many of which quickly flip their shares in early trading.
During the Dec. 10 meeting, Goldman Sachs said it would be open to restrictions on allocations to friends and family -- a practice in which company executives are allowed to distribute a certain quantity of shares to people they know, the person present at the conference said.
"The IPO process has taken a left hook to the solar plexus," said Joseph Bartlett, a securities lawyer at Morrison & Foerster LLP, who specializes in venture capital funding. "It's too important to the economy not to step back and take a good hard look."
The IPO committee is headed by former Philip Morris Cos. <MO.N> Chief Executive Geoffrey Bible.
Other members of the committee include: Daniel Tully, a former head of Merrill Lynch & Co. <MER.N>; Peter Brooke, the founder of Boston-based private equity fund Advent International; John Brennan, chief executive of institutional fund manager The Vanguard Group; Martin Lipton, a pioneering mergers and acquisitions lawyer from Wachtell, Lipton, Rosen & Katz; and John Markese, president of the American Association of Individual Investors.
(-- Additional reporting by Brian Kelleher)
12/24/02 14:03 ET |
