Turmoil halts the IPO gravy train

News Analysis: Investment houses will pay dearly if the number of flotations does not pick up again soon
FOR THOSE in the charmed inner circle of the global equity business, this is usually the worst time of the year to get hold of people. The October/November period is high season for new issues business and the time when every banker is boning up on his colloquial Portuguese and racking up the air miles. This year, by contrast, nearly all the bankers are to be found at their desks.

In the fourth quarter of 1997 new issue activity hit a record $30bn and, with a number of deals in the pipeline, it seemed that the last quarter of 1998 would be even bigger still. That was until the financial crisis hit, turning bulimic money managers into anorexics over night.

Given the rocky state of the markets, Goldman Sachs and Nikko cannot quite believe that they managed to complete the $18bn float of Japan's mobile phone operator DoCoMo - the largest global initial public offering (IPO) to date. It will probably be the last deal of any size this year.

Last month, when Goldman Sachs pulled its own IPO - citing the 60 per cent drop in share prices in the investment banking sector since the near- collapse of Long-Term Capital Management - co-chairman Jon Corzine said he was just taking the advice he would give to any client in similar circumstances.

Most have taken him at his word. Those deals being done, such as Greek telephone company OTE whose secondary offering has just been launched, are either very small or tend, like Swiss Telecom, to be safe and dull. They are also being done at prices 20-30 per cent below what they might have expected to get in July, something only a few sellers can stomach.

Last week the $1bn float of Amadeus, the airline ticket reservation company, was pulled. Other big deals scheduled for the autumn, such as Rupert Murdoch's US TV arm Fox, the Air France sell-off, and a secondary offering in France Telecom have also been pulled.

The worst hit are offerings from banks and insurance companies. Fortis Amev, the Belgian/Dutch insurer, did tap the markets but switched from a straight equity issue to a convertible bond. Others such as Banco di Napoli and Unicredito, both Italian banks, have just been pulled.

According to Goldman Sachs' estimates some $20bn of deals have been pulled over the past few weeks - and that is just those that have been made public.

Optimists, and you have to be to spend your life convincing obstinate Scottish fund managers that the 10th telecom company knocking on their door that week is as exciting as the first, believe there is so much pent up demand that when the market comes, activity will be even stronger than before. UK institutions are sitting on $100bn of cash. That money will have to go somewhere.

Dante Roscini, co-head of equity capital markets at Goldman Sachs in London, says: "In 1990 when Saddam Hussein walked into Kuwait, the market was shot for six months. When it opened it opened like a firework."

If it doesn't, a lot of people are in trouble. Although UK equity issues are what plays to a British audience, and to the dwindling band of UK- owned independent houses, the money to be made out of the crowded and overbroked UK market is small beer compared with what the global IPO has delivered in good times.

Goldman and Nikko, which jointly led the DoCoMo deal, between them pocketed $486m in fees. On a $1bn deal a lead manager can usually expect at least $100m in fees.

Global IPOs are a labour-intensive business. Each deal employs armies of bankers, research analysts and salespeople, not to mention the attendant lawyers, accountants, consultants and public relations agencies, particularly important for privatisations with big retail tranches, all of them expensive to run.

But the investment houses also need a constant flow of large deals. Most of the big houses have geared up massively in anticipation of the extraordinary activity of recent years being the norm. Firms such as Goldman Sachs and Merrill Lynch have boosted headcount in London by as much as 20 per cent over the past few years - most of their expansion predicated on the euro hastening the rush of European firms to the equity markets and requiring access to the global capital market, to which London, as ever, holds the key.

Other, regional players, such as France's Paribas or Germany's Commerzbank, have seen the opportunity for money to be made and bought expensive bankers in an attempt to break into this exclusive club.

John St John at Salomon Smith Barney says that even when the market does get back to a semblance of normal activity, it will be the less cyclical industries such as telecoms that people will want to invest in. Some sectors such as luxury goods and airlines, not to mention investment banks, have probably missed out for this economic cycle at least.

Wise as ever after the event, some bankers are hoping that a downturn will bring some normality back into a business where there have been signs of weaker houses buying their way into deals by undercutting rivals on fees.

"In tougher markets," says Mr Roscini, "quality will tell". But they may be deluding themselves if they believe that new entrants such as Donaldson Lufkin Jenrette and Commerzbank are going to shut up shop easily.

Much has been made of the big cutbacks in staffing at City securities houses. But the jobs shed have been mostly in emerging markets debt business, which have suffered badly because of the Russian bond debacle. As far as the global IPO business is concerned, banks are still fully staffed and anticipating a return to boom. The price for such optimism may be high.