Outlook: Underwriting

SO THAT'S it then. After a year-long investigation, presumably at a cost of several hundreds of thousands of pounds, the MMC has produced a report on the City underwriting cartel which is a masterpiece of irrelevance and a warning to all of the dangers of overly theoretical thinking on entirely practical matters.

The irrelevance of it first. Unsurprisingly, the MMC finds that a cartel does exist in sub-underwriting of the new issues market, and that this operates against the public interest, in that fees would be lower but for its existence. Nobody would disagree very much with that general observation.

However, since hardly anyone raises money in the new issues market any longer - to the contrary, the overwhelming trend is towards the redemption of equity capital - this doesn't seem terribly important.

Circumstances could change, of course, and the new issues market might pick up again. But given the range of alternative markets now available to vendors, and companies seeking to raise more capital, the cartel's power is probably on the wane anyway.

In any case, it is not clear that the system of fixed commissions used in the City new issues market does in all cases operate against the public interest. Take the recent fiasco of an attempt to float William Hill, where an American style book building approach was adopted. Investors naturally moved to bid down the vendors as far as they could, forcing repeated cuts in the price. In a traditionally underwritten offer for sale, this could not have happened. The issue would by now have been away at the higher end of the range of expectations and it would also have been a success.

With rights issues too, it is by no means clear that the system operates against the interests of all clients. Very large companies would of course see a considerable fall in the costs of raising new capital if fixed commissions were abandoned, but for small and medium sized companies the effect would be the very reverse. This would indeed be perverse, given that to the extent that there is demand for fresh equity capital at present, it comes from smaller enterprises, not from big ones.

As it happens, the MMC has backed away from suggesting anything precipitous in terms of remedies. The worst it can come up with is that directors explain themselves to shareholders when they use the traditional underwriting cartel. It is hard to avoid looking at yesterday's MMC report without thinking - why did they bother?

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