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Brazil: Did Merrill bid too low?

A bid so finely priced as to put profits in doubt, a smouldering argument over 500 years of iron ore reserves, the lack of a new story to tell investors - these are the problems Merrill Lynch faces after winning the mandate to privatize Companhia Vale de Rio Doce. Competitors that failed to secure the contract say they are sleeping better now it has gone to someone else. Brian Caplen reports.

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In January, Merrill Lynch won a mandate in Brazil as global coordinator for the privatization of mining conglomerate CVRD. The fee will be just 1.91% of the funds raised. This is bad news for other leading investment banks which regularly compete for the world's top mandates. Fees are coming down. Rewards for executing large, complex, time-consuming privatization issues are falling, just when the deals are getting tougher to complete, and the cost of maintaining a high-powered privatization team is still rising.


The drop in fees is especially pronounced in emerging markets. Goldman Sachs took 4.5% on the first offering of shares in Mexican telephone company Telmex in 1991. In 1993, CS First Boston earned 4% for the privatization sale of Argentine oil company YPF. Already fees were under pressure. When Goldman came to do a second Telmex tranche in 1992, the fee was 3%.


The bad news for the banks is that the slide will probably continue. Competition is still strong from firms desperate to establish their credentials in the international equity market. In emerging markets, even though mandates can become a curse - last year's plum Asian deal, Indonesia's PT Telkom, turned out an embarrassing failure - the desire to win them is still fierce.




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