When Kraft Foods Inc sold shares to investors this week in the largest US initial public offering (IPO) this year, it did so without any help from Merrill Lynch & Co, the firm that employs the most stock brokers. Merrill also did not play a leading role when Lucent Technologies sold US$3.6 billion of stock in a spin-off of its Agere Systems unit in March.
Those were the two biggest offerings this year and the first of the 20 biggest on record in which Merrill did not hold the coveted position of lead manager or co-manager.They also were spin-offs by major corporations that have been asking investment banks like Merrill, Goldman Sachs and Morgan Stanley to do more than they are willing or able to do. Increasingly, companies like Philip Morris, which sold Kraft shares to the public, are demanding that Wall Street firms extend big, barely profitable loans if they want to have a shot at the highly profitable assignments of managing offerings of stocks and bonds or advising on mergers.
High stakes
The stakes are rising as a handful of giant domestic and foreign commercial banks are making an aggressive push to break the stranglehold of the elite group of investment banks.
David Komansky, Merrill's chairman, recently told the firm's brokers that the chief executive of a long-time client had notified him that Merrill would not handle the company's next stock offering. Next time around, Komansky said he was told, the unidentified company planned to hire "one of four or five commercial banks because they provided something like US$2 billion" in credit to the company. Merrill officials declined to name the company.
"Right now, it's a challenge for us," Komansky told the brokers. "Clearly, the banks are using their muscle," he said, to get between the investment banks and some of their biggest clients.
The heightened competition could not come at a worse time for stand-alone investment banks. Mired in their first year of declining profits in almost a decade, they have laid off thousands of bankers and cut costs as revenue from underwriting and trading has dropped sharply.
Meanwhile, the dwindling group of major commercial banks have more leverage than ever. After years of consolidation, there are only a few banks that can meet the borrowing needs of big domestic and global corporations. When those borrowers get into a financial bind, as many telecommunications and technology companies have in the last year, they are more inclined to try to appease the people whose loans are keeping them afloat.
After Merrill and Goldman Sachs balked last year at joining the list of lenders to Philip Morris, the company crossed them off the list of prospective underwriters for Kraft, according to several Wall Street executives. Top billing for the US$8.7 billion stock sale went to affiliates of two big banks, Credit Suisse First Boston and the Salomon Smith Barney unit of Citigroup, vaulting them into the No. 2 and No. 3 positions, respectively, among underwriters for new offerings this year.
Citigroup also has moved ahead of Goldman, Morgan Stanley and Merrill to the top spot this year in disclosed fees from underwriting stocks and bonds. Citigroup has earned almost US$1 billion of the US$5.6 billion in underwriting fees this year, according to Thomson Financial Securities Data.
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