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Fees: Gravy train gets bogged down

Competition is driving down the fees banks charge for running privatization issues. Last year's 3% is heading below 2%. Top firms argue that skimping on fees damages issue quality and, especially, after-sales service. But the same firms are cutting their charges to stay in the game. Peter Lee reports.

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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