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Tuesday, August 23, 2005

The Non-7% IPO Underwriting Fee

Monday's Wall Street Journal (online subsription required) has an interesting article on IPO underwriting fees. Since Ritter and Chen's 2000 article, it's been pretty well known that there's an inordinate number of underwriters fees at the 7% level for bringing a company public.

However, lately there have been a lot more deals coming in at less than a 7% fee. Some of this is due to deals being reduced in size (an underwriter will negotiate a lower percentage if there are more proceeds. If the deal proceeds end up less than expected, the percentage isn't renegotiated. So, the underwriters end up with the originally agreed upon percentage.

But, the more interesting factor could be the increased number of private equity firms being involved in the IPO process. Compared to the owner of a private company, these investors tend to be sophisticated "repeat" customers. As a result, they understand the limits of how they can negotiate far better than the relatively unsophisticated owners. Consequently, they're likely to negotiate a lower percentage fee.

Hard to work up much sympathy for the investment bankers - they've merely gone from having an incredibly lucrative business to one that's just slightly obscenely profitable.

Click here for the whole article.

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