Equity underwriters are looking ahead to the final months of this year with a mixture of excitement and trepidation. Rarely have there been so many deals looking to be done in such a short time. According to Salomon Smith Barney's calculations, by early September $48 billion of deals had been announced that issuers were hoping to complete by the end of the year. And that figure included only European issuers. The true volume of deals hanging over the markets will be quite a bit larger, including several billion dollars worth from Asia and other deals from Europe and elsewhere that are being worked on behind the scenes.
After a busy second quarter, with equity issuance in June alone at more than $30 billion, 1999 has already been a bumper year for supply of new equity. By the beginning of last month, according to Salomon Smith Barney, $82 billion of new European equity had been issued in 1999, just below the figure for the whole of 1998 and not far off the $101 billion brought to market in 1997.
However, in spite of the robust volumes, equity capital markets teams have not found life easy in 1999. For one thing, there has been unprecedented volatility. That makes it difficult to time an offering of new stock and deliver the price promised to the issuer. "The market went through a patchy period earlier this year," recalls an equity capital markets banker, "in which almost everyone had a bad deal. Much of the reason for that was because everyone had so much work on. People's attention to detail slipped. The next few months could be an equally testing time."
And already there are signs that investors will give many deals the cold shoulder. Last month Regus, a UK company that rents out office space, postponed its planned flotation, apparently because the market was not willing to offer the sort of money it had in mind. French oil company Elf also cancelled its plans to sell part of its stake in pharmaceutical company Sanofi-Synthélabo. And San Miguel Corporation of the Philippines abandoned plans to sell 21% of Australia's Coca-Cola Amatil. Other deals are likely to be pushed into next year or reduced in size. Bankers' great fear is that those deals that go ahead will have to be priced lower than expected or will underperform in the aftermarket. That has already been the fate of many deals this year.
The valuation game constantly played between buyers and sellers is becoming ever more subtle. If sellers don't like the multiples the market is prepared to offer them they have several alternatives. Trade buyers are often willing to pay more than the market for a company because of their inside knowledge of an industry, because of cost savings they can achieve by merging the company with their own operations, or because of the sheer empire-building hubris of their managers. Financial buyers tend to be driven by dispassionate financial analysis. But with ever more money flowing into private-equity funds, particularly those targeting European buy-outs, competition is driving up prices private equity buyers are willing to pay as well.
But sellers don't hold all the cards. Public market investors know that most managers would rather do an IPO or secondary offering and keep control of their companies than sell them to their fiercest competitor or to a ruthless, cost-cutting buy-out fund. And the heavy supply of equity deals means investors can afford to sit out any deal they feel is overpriced or which fails to present a convincing story.
That makes matching buyers and sellers ever harder. "Selectivity is creeping into the institutional marketplace," says Charles Kirwan-Taylor, managing director in Credit Suisse First Boston's equity capital markets division. "The volume of deals is increasing the demands on buy-side analysts and they are becoming more demanding, as they have every right to be, on the banks. This means that in order to get deals done banks have to pay attention to the nuts and bolts of the business: valuing deals correctly, getting the process right, getting the right information to investors at the right time."
In only a few years bankers have seen successive, overlapping waves of equity issuance from Europe and each type of seller requires a slightly different approach. Europe's privatization boom continues, but increasingly governments are selling off secondary stakes of what are now well-established, private-sector companies. The number of privatization IPOs on the horizon is dwindling. Privatization, however, has still accounted for much of the equity issuance this year and for some of the biggest deals, notably the €10.4 billion ($11.3 billion) secondary sale of Deutsche Telekom, the secondary sale of stock in Portugal Telecom and the IPO of Telecom Eireann.
Equity capital markets bankers struggle to hide the fact that working on privatizations is a frustrating business. Political or legislative considerations, rather than market conditions, tend to dictate timing, so there is often little scope to delay a deal if the market is not ready for it. One banker likens a privatization to a train: "It ploughs ahead on its predetermined course regardless of what comes in the way of it." What's more, governments are loth to accept lower prices than they had expected if the market takes a tumble or decides it doesn't like that particular deal. More often than not the expected cash windfall has already been earmarked for a particular purpose. And then there is the problem of fees. The need for transparent government often dictates that the mandate for underwriting a privatization has to go to the bank that makes the lowest bid regardless of its ability to place the paper at a good price.
For the most part, bankers would rather deal with businessmen than work with bureaucrats. The great hope of recent years was that Europe's army of family-owned businesses would, as their founders retired and expired, march headlong into the public equity markets, creating a steady flow of IPOs. And there has indeed been an increase in IPOs from mid-size, privately owned companies, particularly in southern Europe.