October 25, 2020

DealBook: In I.P.O. Price Debate, an Investment Giant Weighs In

You might recall that about a week ago, my colleague Joe Nocera wrote an intriguing column about LinkedIn’s initial public offering, in which he said that the bankers who underwrote the deal “scammed” the social network company by pricing it too low, lining the pockets of its investor clients.

I countered two days later, arguing that the bankers, at worst, made a mistake, but that the I.P.O. price might actually have been correct given the outsized interest in social networking companies.

Over the weekend, a new entrant waded into the I.P.O. pricing debate: BlackRock, the giant money manager.

In a letter to British securities regulators, which was reported in the press over there, BlackRock said it was worried that investors, not companies, were getting the short end of the stick. While BlackRock’s letter was unrelated to LinkedIn’s offering, the investment firm suggested all the same that the I.P.O. process had grown unfair because banks have been intentionally overpricing companies to garner higher fees.

We are concerned that companies are appointing advisors based on indications of valuation that are unrealistic. …

We are concerned about the structure of incentive fees which maximise your returns for the price achieved on the first day of trading rather than at some, more distant date, e.g., six months after float. Such fees do not represent an alignment of interests between us and seem to drive increasingly aggressive behaviour from syndicates.

BlackRock’s view runs counter to Joe’s argument that investment bankers underprice I.P.O.’s so that “money could be diverted to favored investors.” In fact, it’s the opposite viewpoint.

Clearly, there are many ways to look at the process. As one retired banker e-mailed me, “We never make everyone happy. We are supposed to, at the conclusion, make sure all sides are equally UNhappy.”

Perhaps that’s unsatisfying. But it’s true.

Article source: http://feeds.nytimes.com/click.phdo?i=206c63f4c99e72dbb19bb032b4a66108

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