underwriters

DealBook Column: Two Ways for Banks to Win With I.P.O.’s

December 20, 2011 by NewsMaker Leave a Comment

Stephen Lam/ReutersMark Pincus, a co-founder of Zynga, which went public on Friday.

There was a lot of back slapping at Morgan Stanley when Zynga had its market debut on Friday. But it should hold the self-congratulatory applause.

Morgan Stanley scored the coveted position of lead underwriter for Zynga’s initial public offering. The offering was considered a lucrative win for the bank: it was paid more than $10 million for marketing and distributing shares of the new stock. In total, Zynga paid out $32.5 million in fees to its underwriters. They included a laundry list of other Wall Street heavyweights too, like Goldman Sachs (which took in about $8.7 million).

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So far, however, Zynga’s stock appears to be a dud. Its shares, which were initially priced at $10 each on Friday morning, fell to $9.05 by the end of trading Monday.

But there were even bigger losers before Zynga’s shares began trading: some of Morgan Stanley’s wealthiest clients. The bank’s investment management group used a collection of 11 of its mutual funds to buy into pre-offering shares of Zynga in February, when it paid $14 a share on behalf of its investor clients. In total, Morgan Stanley invested $75 million of its clients’ money to buy about 5.3 million shares of Zynga. As of Monday, its clients had lost a third of their investment, or about $25 million on paper.

Morgan Stanley, which has been the top underwriter of hot technology I.P.O.’s, has often used client money to invest in pre-I.P.O. shares. Coincidentally or not, it has often later found a way to land a role as a lead underwriter. In that position, it reaps eight-figure windfalls for the firm.

Such investments raise a question that has long been whispered about but rarely asked aloud: Should investment banks seeking underwriting roles in I.P.O.’s be allowed to invest client money in prospective corporate clients ahead of a potential deal?

“I’m sure it doesn’t hurt when you’re doing the I.P.O. bake-off to be an investor,” said Steven N. Kaplan, a professor at the University of Chicago Booth School of Business.

Frank Partnoy, the director of the Center on Corporate and Securities Law at the University of San Diego and a longtime critic of Wall Street (and a former Morgan Stanley employee) has an even more skeptical view. “It’s another example of how the cash cow of I.P.O.’s creates corruption and self-dealing,” he said, adding that he takes “the corruption part as a given.”

He said that he was not so cynical as to believe that such investments were being directed by bankers or their chiefs, but that it represented a larger culture and ethos problem on Wall Street. “I doubt it’s orchestrated, but I think it’s endemic to large bank holding companies. From the top they think they have a Chinese wall. But it’s only three feet high.”

In fairness, pre-I.P.O. investments are just as often a success as they are a failure. Morgan invested client money in Groupon in January at a $4.7 billion valuation. The deal was a huge win. Groupon’s market valuation is now worth $14.2 billion. And who later led Groupon’s I.P.O.? Yep, Morgan Stanley. Its underwriting fee: $17.4 million.

Banks say that investments made on behalf of investor clients are completely separate from their investment banking divisions and would never be influenced by the prospect of I.P.O. fees and the stream of other fees that are typically generated from the relationship developed underwriting a public offering. (The underwriting is usually just the tip of the iceberg; a successful I.P.O. often means the lead banks get to underwrite secondary offerings and manage personal money on behalf the company’s executives.)

Mr. Kaplan acknowledged that such investments might represent a perceived conflict. “A mutual fund of a bank is only going to make the investment if they think it’s a good investment,” he said. He pointed out that investment managers were typically paid based on the performance of their funds, not on the take of the firm’s investment banking business. Still, he said, the banks “get inside information.” He added: “This asks the whole question of whether the banks should be broken up. It’s the Glass-Steagall question,” he added, referring to the 1933 act that split investment and commercial banking and was repealed in 1999.

Privately, bankers say that while there is supposed to be a clear Chinese wall and that they do not seek to influence other parts of the firms, the fact that a big bank has the ability to make an investment either itself or by introducing a prospective client to the asset management side of their business can help build a relationship with potential corporate clients. A spokesman for Morgan Stanley declined to comment on the issue.

In January, Goldman Sachs invested $450 million of its own money and about $1 billion from its overseas clients in Facebook ahead of the company’s planned I.P.O., which is expected to take place in the first half of 2012. It has long been speculated that the transaction will help Goldman’s chances of being selected to underwrite the offering.

Facebook is now valued at more than $100 billion — so Goldman and its clients appear to have made money on paper. Facebook is in the final throes of deciding on underwriters for its initial public offering, and Morgan Stanley, Goldman and JPMorgan Chase are all considered contenders for the top underwriting spot. Facebook is expected to pay more than $100 million in underwriting fees.

To be fair, in every case that I have found, banks like Morgan Stanley and Goldman properly disclosed their potential conflicts to the public. In Zynga’s prospectus, there is a section that clearly states that Morgan Stanley, through its mutual funds, had a stake in the company. Similarly, Morgan Stanley’s prospectuses for its mutual funds clearly say the firm may have other relationships with the companies that it invests in.

Nonetheless, as arm’s length as such investments may be, they raise questions among investors. “The disclosures just illustrate to me that they have bulletproofed themselves from lawsuits,” Mr. Partnoy said.

In February, JPMorgan raised a $1.2 billion fund, called the J.P. Morgan Digital Growth Fund, to invest in pre-I.P.O. shares of hot technology companies. While the idea for the fund came from the asset management division and the investment bank was not even told about it until after it became public, it was seen, perhaps unfairly, as a way for the bank to get closer to prospective corporate clients.

Representatives for Goldman Sachs and JPMorgan declined to comment.

“You could tell a positive story or you could tell a conflict story,” Mr. Kaplan said.

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Filed Under: Business News Tagged With: heavyweights, investment management group, underwriters

DealBook: Banks Bullish on LinkedIn

June 28, 2011 by NewsMaker Leave a Comment

LinkedIn is a long way from its first day pop, when it traded above $100 a share.

But its underwriters are feeling pretty optimistic.

In research notes released on Tuesday, JPMorgan Chase, UBS, Morgan Stanley and Bank of America Merrill Lynch all initiated bullish ratings on the professional social networking site. Amid the vote of confidence, shares of LinkedIn jumped more than 12 percent in morning trading on Tuesday.

The lead underwriter, Morgan Stanley, placed an overweight rating on LinkedIn, with an $88 price target. LinkedIn, which the firm said might become a “standard utility for H.R. recruiters,” is expected to continue to post strong revenue growth. Although Morgan Stanley said there were some risks, like competing social networks, the firm was extremely bullish.

“Every once in a while, a company comes around that transforms an industry in such a way that investors have difficulty grasping just how big it may one day become,” the note said. “We believe LinkedIn can be one of these companies.”

JPMorgan also gave LinkedIn an overweight rating and set an $85 price target.

One of its analysts, Doug Anmuth, says LinkedIn is “disrupting both the online and offline job recruitment markets, and deeper corporate penetration and increasing member engagement will drive strong results over the next few years.”

Given its leading position as a social network for professionals, he said, LinkedIn should also be able to capture a greater share of the $27 billion global market for staffing. He cautioned, however, that if economic conditions deteriorated and the job market slowed, LinkedIn could be worth $60 a share, based on a discounted cash flow valuation.

UBS weighed in with a buy rating and a more bullish $90 price target. Like its peers, UBS called LinkedIn’s business “disruptive,” and said it would most likely record “better than expected growth in the user base, with corresponding revenue outperformance.”

Rounding out LinkedIn’s top underwriters is Bank of America Merrill Lynch. The firm gave LinkedIn a buy rating and a price target of $92. Calling it a “$10 billion long-term revenue opportunity,” the bank said LinkedIn’s shares should benefit from several key drivers: strong second-quarter results, international traction and new products, which should be a bigger focus next year.

Some of the other equity research houses on Wall Street, however, have assumed a more subdued stance. Evercore Partners, which released its note earlier this month, initiated coverage with an equal-weight rating and a price target of $70, below where the shares are trading now.

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Filed Under: Business News Tagged With: discounted cash flow valuation, merrill lynch, underwriters

DealBook: Treasury Gets Small Profit From Sale of A.I.G. Stock

May 25, 2011 by NewsMaker Leave a Comment

ReutersRobert H. Benmosche, chief executive of A.I.G., led it to the share offering.

9:32 p.m. | Updated

The United States Treasury wrung a small profit on Tuesday from the first sale of its shares in the American International Group, a major step toward unwinding the government’s ownership from a 2008 bailout.

The insurer raised at least $8.7 billion from the offering, which priced shares at $29 each. After the offering, Treasury’s stake in the company fell to about 77 percent from 92 percent. Its ownership stake could fall even more if underwriters are able to sell an additional 45 million shares for the government through an overallotment option.

As a result, both the Treasury and A.I.G. called the offering a major accomplishment, reassuring taxpayers that they would not lose an enormous sum of money and encouraging new investors to consider the company. The Treasury made $54 million from the sale on Tuesday.

“Today’s announcement represents an important milestone as we continue to exit our stake in A.I.G. and wind down TARP,” said Timothy F. Geithner, the Treasury secretary.

But the price set was barely above the Treasury’s break-even price of about $28.73. While expectations for the offering had been high — at one point, the so-called “re-I.P.O.” was speculated to attract as much as $25 billion — A.I.G.’s stock price has slid 49 percent this year.

And the government still has about 1.5 billion more A.I.G. shares to sell at a time when investors are questioning the profitability and long-term value of the company’s core insurance business.

A.I.G. has jettisoned several major divisions, refashioning itself into a leaner company focused on providing global property and casualty insurance and domestic life insurance.

Yet while A.I.G. is now a simpler company, doing more than half of its business under the name Chartis, it may still be too soon for investors to fully understand it. The insurer itself raised a major question about its value on Tuesday, when it acknowledged in a regulatory filing that it had not been forthcoming with investors about the adequacy of its reserves.

The filing indicated that in a recent road show to market the stock, A.I.G. executives told investors that the company’s reserves had been vetted by two federal bodies, the special inspector general for the Troubled Asset Relief Program, and the Government Accountability Office. In fact, the filing said, neither body had reviewed its reserves.

Reserves refer to the money that insurers set aside over time to pay claims. They are important to investors because if a company discovers it has not set aside enough, it must bolster the reserves by diverting money from income.

That is what happened to A.I.G. It said earlier this year it would take a $4.1 billion charge to earnings after an annual review showed it had to bolster reserves at Chartis; the same type of review a year earlier caused the company to set aside an additional $2.3 billion on a pretax basis. Those announcements seemed to vindicate a previous research report by firm Sanford C. Bernstein Company, which warned of a looming shortfall in A.I.G.’s property and casualty reserves.

More recently, A.I.G. has disclosed $1.7 billion of pretax catastrophe losses from the earthquakes and nuclear accident in New Zealand and Japan, and from the flooding in Australia. The company’s possible exposure to the recent storms and floods in America is not known.

New filings with state insurance regulators also show that the largest operating subsidiaries of Chartis, including American Home Assurance and the National Union Fire Insurance Company of Pittsburgh, do billions of dollars of business with each other. They are essentially relying on each other to an unusual degree to make good on their promises.

Even after the companies were disentangled under federal oversight, some of the subsidiaries’ relationships have grown. National Union, for instance, is owed about $38 billion in reinsurance payments from more than 40 related companies all over the world as of the end of last year, according to filings with its home state regulator, Pennsylvania.

Treasury acquired its enormous stake through its rescue of A.I.G. during the financial crisis of 2008, when the government committed to providing up to $182 billion in assistance.

After Tuesday’s offering, the Treasury Department’s remaining investment in A.I.G. will fall to about $53 billion. It still owns about 1.4 billion common shares and $11.4 billion worth of preferred shares. The Federal Reserve Bank of New York also has about $23.6 billion in loans outstanding to two investment vehicles set up to house A.I.G. Securities.

In charting their plans for the offering, Treasury officials again face the difficult task of quickly shedding their stakes in the company while reaping a fair price for taxpayers.

While the government still has significant investments in several companies, including General Motors and Ally Financial, A.I.G. has long been considered the biggest and most prominent reminder of the 2008 crisis.

For A.I.G., the offering was a vital part of its effort to re-establish itself as a private company. Under its chief executive, Robert H. Benmosche, A.I.G. has already sold off a number of businesses to help pay off the Treasury Department and the New York Fed, including several big Asian life insurance units. And late last year, the company sold $2 billion in new debt.

Under the terms of the offering, the Treasury Department is prohibited from selling additional shares for 120 days. Government officials previously expressed hope that they could sell the entire stake within two years.

Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs and JPMorgan Chase led the stock sale. The company disclosed this month that it would cover the government’s fees in the stock sale, at a cost of nearly $400 million.

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Filed Under: Business News Tagged With: american international group, enormous sum, underwriters

The Haggler: Better Business Bureau Makes Its Case

April 9, 2011 by NewsMaker Leave a Comment

Complaints about companies often appear to be deflected by the Better Business Bureau, and some companies keep an A-plus rating on the group’s Web site despite dozens, even hundreds, of gripes. More than a few of the companies are paying annual dues to the bureau, leaving the unfortunate impression that the organization may be shilling for its underwriters.

A spokeswoman for the Council of Better Business Bureaus — the patient and unflappable Susan Kearney — has been asking for the opportunity to respond. Which only seemed fair. So in this episode, the Haggler conducts an interview with the president and chief executive of the Council of Better Business Bureaus, Stephen A. Cox. We spoke by phone on Wednesday.

“One point is that we are a 100-year-old nonprofit that is in transition, and that’s a good thing,” said Mr. Cox, who is based in Arlington, Va., when asked for a kind of opening statement. “We’re transitioning from who we were to who we have to be to meet the needs of today’s marketplace.”

What that means, he went on, is that the Better Business Bureau is evolving from its beginnings as a “grass-roots, look-’em-in-the-eye organization,” as he put it, to “an online provider of consumer information.”

All well and good, sprucing up the technology, the Haggler replied. But let’s talk about the perils of a business model that is financed, in large part, by members that it grades. Is that not a conflict of interest that is just begging for abuse?

“First, our funding model is not new by any means,” Mr. Cox said. “There are certainly critics of our funding model. I’m not trying to back off it, or apologize for it. We’ve got a longstanding history of doing right by consumers and businesses.”

That said, he noted that a committee formed last October had been charged with taking a look at the ratings system, with a final report due in June. The group is considering whether letter grades — which have been used for just two years, having replaced the simple “satisfactory” or “unsatisfactory” approach used for decades — are the right way to go.

“I would highlight,” Mr. Cox said, “that not every accredited company has an A-plus rating, and we’ve revoked the accreditation of 4,000 businesses” in 2010.

(Haggler aside: Can you imagine if the bureau gave every accredited company an A-plus, and had never kicked out an accredited business?)

“Are we perfect? No. No organization is,” Mr. Cox went on. “Are we always trying to improve? Every organization is.”

The Haggler noted that for years, members of the Better Business Bureau were not allowed to publicize their membership, for fear that it would tempt the organization into pay-to-play shenanigans. Why not go back to those old-school rules?

Mr. Cox did not exactly leap at this suggestion. Instead, he noted that a survey of people who used the Web site had found that 85 percent of respondents felt that the organization’s ratings were helpful, and that 88 percent felt that they were fair. Yes, he added, the survey was paid for by the Better Business Bureau.

“Can you go out and find other issues that are head-scratching?” he asked, referring to previous Haggler columns. “I guarantee you can do that. On the whole, though, I think we’re doing pretty well. But I’m not satisfied with pretty good. We’ve got to do better.”

One theory about the Better Business Bureau’s current rash of troubles — it’s been criticized on “20/20” and in other newspapers — is that the organization is facing a serious threat from opinion Web sites, like Yelp, where consumers can post their own ratings and positive and negative reviews.

The Haggler related to Mr. Cox a recent Yelp experience of his own. A company, which for the sake of mercy shall not be named here, recently installed some window shades in the Haggler’s Cave of Justice — a k a, his home — and after some confusion about price, a rather stunning conversation with a salesman at the company ensued. We’ll skip the details, but the Haggler opened with a benign, “I think we have a disagreement about cost,” to which the salesman responded, “You misled me!” and promptly hung up the phone.

A withering review was posted on Yelp. The next day, the owner of the company e-mailed to ask what it would take to have that review taken down. The Haggler asked the owner to double-check the cost of the shades, and for an apology from the salesman.

The next day, a partial refund and remorseful e-mail from Mr. You Misled Me! were both issued. Down came the review.

CONTRAST this with the experience of readers who’ve been e-mailing the Haggler to report their lengthy and ultimately futile attempts to agitate through the Better Business Bureau. How, the Haggler asked, can Mr. Cox and the 120 bureaus across the country compete?

“We fully recognize that our complaint system needs to be simplified and it needs to be streamlined,” Mr. Cox said. He noted that the bureau provides ratings of its own, which is quite a different service than a free-for-all of opinions. Mr. Cox was conciliatory at other moments, but politely stood firm on the basics of the bureau’s economic model. Which, the Haggler would argue, makes “head-scratchers” totally inevitable.

And so we wrap up this four-column series with a solemn vow. In the past, the Haggler has cited Better Business Bureau ratings to suggest that a given company is either beloved or despised by the public.

Oopsy daisy. That will never happen again.

E-mail: haggler@nytimes.com. Keep it brief and family-friendly, and go easy on the caps-lock key. Letters may be edited for clarity and length.

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Filed Under: Business News Tagged With: mr cox, perils, underwriters