UK IPO reforms: how we got here
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UK IPO reforms: how we got here

Concerns about the independence of IPO research are nothing new, but the UK regulator’s proposals give it a chance to finish the job.


At last, the Famously Cautious Agents of the FCA – the UK regulator otherwise known as the Financial Conduct Authority – ‎have rustled up a concrete proposal that has the startling virtues of being needed and constructive. They reckon that UK IPOs require a shake-up when it comes to the treatment of research and the provision of information to the market.

They are correct. Information provision in UK deals lags behind some other markets. And for too long the lack of any meaningful independent research has been the dirty little open secret of the IPO process. It is high time it was addressed properly.

The FCA has some catching up to do. Its report into competition in wholesale banking last year was roundly derided for its conclusions, among which were the findings that banks favour some clients over others in allocation processes and that there is creative use of league tables to pitch for business.

The regulator’s suggestions would require issuers to present to independent analysts ahead of the formal launch of any deal, so that potential investors get a chance to see views other than those from banks working on it. It’s a sensible suggestion that seems hard to argue against.

Back to the future

We have been here before – once in a big way, other times in a more limited way, including the occasional complaints of a broken IPO market in recent years. The big one first: the grandly titled Global Analyst Research Settlement of 2003, the result of a legal challenge brought against 10 big US financial firms that lifted the lid on the widespread influence that investment bankers wielded over their research colleagues.

The Settlement saw the firms pay about $1.4 billion in relief and to help fund independent research. It also established the concept of physically separating research from investment banking departments.

Outside the US, however, things remained somewhat fuzzy. They tended broadly to mirror the outcome of the Settlement – particularly at those US firms – but a few peculiarities could still pop up. By virtue of their focus on research, some are instructive for the current debate.

The most relevant was the competitive IPO, which developed into a somewhat unpleasant trend in the mid 2000s. The forerunners to a flurry of mostly sponsor-driven deals were in fact a couple of decent transactions: the 2004 IPO of French directory firm Pages Jaunes, which was being spun out of France Telecom, and a rights issue for France Telecom itself the previous year.

In both deals, France Telecom was trying to avoid the classic bait-and-switch by banks that over-promise on pricing. It opened up its rights issue to competitive bidding by potential syndicate banks when it became clear that the mandated firms were seeking to change their side of the bargain. As a result, it got a better price than originally mooted, as well as paying lower fees.

FT drew on that experience when it came to the Page Jaunes spin-off, but tweaked its competitive idea further. This time the banks’ final roles were to be decided after pre-marketing had been completed, on the basis of their proposed price ranges and the quality of their feedback. In addition, their eventual fees would be related to how close the final price was to their proposals.

The deal was innovative but not perfect, not least because of how the top target accounts found themselves being pestered by practically an entire syndicate.

Resisting pressure

In any case, the competitive IPO didn’t last long. ECM bankers mostly hated it – and continue to hate the way in which it led to the development of the sub-industry of independent IPO advisers that are now a regular feature of deals. The charitable view of syndicate bankers is that such advisers drip poison in the ears of CEOs and sponsors. The uncharitable view is… well, less charitable.

But the process was also killed off by the FCA’s predecessor, the Financial Services Authority (FSA). The more aggressive deals that followed Page Jaunes had begun to make the regulator jumpy about the potential for biased research.

In a document published in November 2005, the FSA wrote: “In a competitive IPO the issuer may be able to exert pressure on the competing firms, directly or indirectly, to produce research that is favourable or which justifies a higher valuation range. This is because firms could be providing their draft research to the issuer in circumstances where the firm is still trying to win a role in the syndicate. In a competitive market, firms may find it difficult to resist such pressure.”

The FSA did not ban such deals outright, but it made it clear that it thought the industry was at risk of overstepping a line. It was right to do so, but it was wrong to limit its response to competitive IPOs. Its successor now has a chance to finish the job.

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