Why are there sometimes so many banks on an IPO/deal?
Why is it that there are sometimes 5+ banks on a single deal? Just as an example, look at the Zoom IPO:
"Morgan Stanley, J.P. Morgan, Goldman Sachs & Co. LLC, and Credit Suisse are acting as lead book-running managers for the offering. BofA Merrill Lynch, RBC Capital Markets, and Wells Fargo Securities are acting as book-running managers, and JMP Securities, KeyBanc Capital Markets, Piper Jaffray, Stifel, and William Blair are co-managers for the offering."
Why does Zoom possibly need MS, JPM, GS, and CS? And then with those 4, why would you ever need BofA and RBC? Given those 6, why would you ever need WF/WB/and a handful of other MM shops? Seems like the fee would just get chopped up into a ton of pieces, which seems like it wouldn't be in anyones best interest. Can anyone explain why this happens?
Hahaha following this. My best guess is so that the banks need to share the underwriting responsibility for big IPOs
It distributes the underwriting risks. Also, when you look at the economics there are some banks that will co-manage and get a tiny slice of the pie because they're initiating coverage.
I would understand if it was say, just JPM and GS splitting it, as that would alleviate the risk. But having 6 different balance sheet banks seems excessive to me. Also, isn't it illegal to exchange banking for initiating coverage?
Just GS and JPM would not alleviate the risks - for a $1 billion IPO (which is not even particularly large), each bank would still have to underwrite $500 million by itself. The economics might be attractive, but who’s to say that either side wants that concentration of risk?
And what about all the other banks that the company uses for its revolver and such? They’ve been counting on that IPO to make it all pay off and you just fucked them by giving it all to GS and JPM.
It is legal for a bank’s research department to take up coverage of all that bank’s IPOs as a uniform policy. Pretty common practice. What you can’t do is promise that you’ll initiate them at a “buy” if they use your bank.
True
Common practice is for the banks underwriting the deal to actually purchase 100% of the issue (equity or debt)...and then distribute (sell) to their client base. So, the banks have real risk here.
What if some news event comes up and nobody wants to buy that stock / debt anywhere near the IPO price? Then the underwriter gets stuck owning the worthless paper.
The underwriter that does all the legal work, writing the prospectus, and other advisory work essentially get paid a fee for those services....but you can think of that separately from the distribution risk of selling the securities into the market.
Sometimes, if the underwriters think the issue will go up in price strongly, they will hold onto some for themselves....which is a kind of prop trading.
That makes sense, thx + SB. Even if that explains why they have 4 BBs + WF/RBC (which are likely the ones doing the underwriting), why include all those MM shops? Maybe Blair does some underwriting, but I don't think KeyBanc/Stifel/Piper have much of a balance sheet? What is their value add?
All of the above answers are accurate, but also... for the company to keep the relationship going with several banks at once. You want to distribute the fees to many different banks because you may need them and they may add value to you going forward.
This. Plus, this is a way to "reward" banks that may have done a lot of following/equity research work that may not have been compensated
As a follow on q, is Zoom paying more in fees vs if they just had one bank do the deal, or is every bank just getting some split of the standard fee?
I believe standard quote for IPO fees is 4-7% of proceeds, but I have the same question as you.
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