Mitch Feierstein: Morals go pop as greedy banks make millions from the great IPO rip-off

 

At a select committee towards the end of last year Vince Cable was grilled about the huge leap in the Royal Mail’s stock market value. As you’ll remember, the company was floated at 330p a share and traded as high as 600p in November, a rise of 82 per cent in a few months.

Mr Cable defended the launch price, saying he considered adding 20p to the IPO price but decided against it because of worries that threatened pre-Christmas industrial action might scare investors away. I’ve no doubt Mr Cable was doing his honest best. That he took the best available advice. That he thought long and hard about the right thing to do.

I’m also in no doubt that he was stolen from. That you were. That companies and company owners are stolen from as a matter of routine.

The reason? Alas, it’s yet another grubby secret to do with the way the finance industry – and investment banking in particular – is  keen to rip off everyone they come into contact with. In particular, Wall Street and their buddies in the City of London have successfully perpetuated a myth about what constitutes a successful IPO: the myth of  the “pop”.

A “pop” is the slang name for the traditional increase in a company’s share price in the day or so post-IPO. So, for example, LinkedIn was launched on to the markets at $45, and the first shares started trading at $83, a massive 84 per cent above the launch price. That might be a fairly extreme example, but pops of 20-30 per cent are common and are widely viewed as the signs of a successful launch.

Wall Street argues that you need to reward your launch investors and you need to get positive stories about the company circulating from the off. A positive market sentiment is born and, if the company lives up to expectations, you have a stock market  success story.

Those are the arguments, and they’re self-serving lies. Sure, it’s probably true that a launch investor is taking a little more risk than an investor who is purchasing a company with a stock market history. So offering those launch investors a little kicker makes sense, like the first airline to take a new type of airliner normally gets fat discounts to compensate for that bet on the unknown.

But with most IPOs, any added risk isn’t that huge. A company like Royal Mail is hardly an unknown quantity. The company’s sheer size means that pretty much every large institutional investor will have to end up owning a piece of it. So an IPO pop of about 5 per cent would be ample – that’s one heck of an overnight return on your money.

So what’s the justification for a pop bigger than 5-10 per cent? The Wall Street story is about positive sentiment, selling a great PR story. And that PR is, I suppose, worth something. If you could simply go out and buy that kind of news coverage, I guess you’d find corporate CFOs willing to splurge maybe half a million dollars, that kind of money.

But the actual cost is eye-watering. Take the Royal Mail. If the shares had been launched at 540p (about 10 per cent from its actual high), the taxpayer – you – would have collected £2bn more than you actually did.

What’s more, the long-term value of that pop is essentially nil. A few years back, a company came to market, valued at about $500m. The price set in early trading fell below the offer price and the company was slated for the failure of its introduction to  the market.

But what a failure it was. The company in question was Amazon, whose stock market value is now around $175bn. Company values are set by the strength of their business and the effectiveness of their management. Anything else, in the long run, is just hooey.

Wall Street will want to interject at this point and remind you that their job as middleman is to strike a balance between the interests of the buyers and the sellers.

And that’s also nonsense. The banks paid to manage an IPO are paid hefty fees by the company and its pre-IPO owners. The banks should have no other interests in mind. What’s more, the owners of the company pre-IPO are the ones who have built the business and deserve to reap the value. The IPO-buyers are financial investors for whom stock price rises and falls are an ordinary and unremarkable part of their business. Sure, they’d prefer a pop to a fall in price, but either way it’s just part of what they do.

So what the heck is going on?

The answer, of course, is that banks are ripping their clients off, as usual. The big investment banks will handle a major equity issue for a particular company perhaps once in a generation, and often just once in a corporation’s lifespan. On the other hand, they do business with the big institutional investors all the time: investors on whose good favour those banks absolutely rely.

And given that banks can choose who to reward with a sweetly under-priced IPO deal, the opportunity for undisclosed conflicts and kickbacks is simply extraordinary.

Nor is it just the equity market where these things happen. The percentage pops in the corporate bond issuance market are similar, but still rip off corporates to the benefit of banks, by screwing the very customers whom it is their duty to protect.

Given that investigators have found collusion and corruption in pretty much every corner of the banking industry isn’t it time to explore the issuance markets too? They’d find a grubby cartel of banks and lead investors handing buckets of cash to each other in some back alley – cash stolen from the companies on whom our economy depends.

The sight might be unedifying, but look on the bright side. The resulting fines would go a good way to paying back Vince Cable’s  lost £2bn.

News
The slice of Prince Charles and Princess Diana's wedding cake and the original box from 29 July 1981
newsPiece of Charles and Diana's wedding cake sold at auction in US
News
James Argent from Towie is missing, police say
newsTV star had been reported missing
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
PROMOTED VIDEO
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone