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Off Wall Street

A new study of IPOs suggests that when commercial-bank subsidiaries serve as underwriters, shares are generally priced more efficiently than when investment banks handle the offering.

3Jun

Investment bankers on Wall Street aren't the only ones who facilitate initial public offerings. Now, they might not even be the best. A new study of IPOs suggests that investment bankers affiliated with commercial banks may hold an advantage.

The study, conducted by academics at Texas A&M and the University of Nevada, examined IPOs issued in the 1990s. It found that when commercial-bank subsidiaries served as underwriters, the shares were generally priced more efficiently.

"One explanation might be that commercial banks have better information," says Paige Fields, an associate professor of finance at Texas A&M and an author of the study. "If the IPO firms were bank customers for other bank products, there may have been inside information that enabled the bankers to price the shares better."

Commercial banks such as J.P. Morgan Chase, Citigroup, and Bank of America have competed in the investment-banking business since the early 1990s, when regulators eased Glass-Steagall Act rules splitting investment and commercial banking. (The law was repealed entirely in 1999.) Since then, the banks have had success in grabbing IPO business partly through their ability to bundle loans and investment-banking
services.

But there are reasons to doubt that commercial banks offer any advantages over investment banks. First, according to the study, commercial banks have lost some of their ability to price more efficiently since they bought investment banks in the late 1990s.

In any case, the choice of banker depends on more than price or easy credit, says Ray Soifer, chairman of Soifer Consulting LLC and a former banking analyst with Brown Brothers Harriman. Companies must consider a bank's IPO track record, its analysts, and its ability to get investors to buy new shares. Such advantages tend to reside with top banks, regardless of affiliation.

Another important factor, adds Henry Graham, CFO of data-communications firm TNS Inc., is whether it's possible to build a relationship that can survive the stress of the IPO process. For its March IPO, TNS chose J.P. Morgan Securities as lead underwriter. Graham says J.P. Morgan won the business largely because of a relationship — one of the firm's bankers had worked with TNS's CEO on an earlier IPO. "You have to ask yourself," he says, "'Who do I want to walk down a dark alley at night with?'"

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