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Small is bountiful

In 2004 equity deals for smaller companies were much more lucrative for investment banks than large block trades, which were often disasters from a profit point of view. Heavy competition for deals, with league table positions strongly in mind, helped kept discounts tight. In volatile markets, banks proved willing to cut their own throats in pursuit of ill-paid privatization transactions. Peter Koh reports


THE PROFITABILITY OF equity capital markets business for investment banks in Europe in 2004 was not nearly as impressive as the volume of deals done, which rose to e133.1 billion in 2004 from e94.3 billion in 2003, an increase of 41%, according to Dealogic.

Dragging down profits at a number of leading underwriters has been the secondary offerings business, where banks have taken some hits amounting to tens of millions of euros on individual trades.

Market sources suggest that losses on a tiny number of transactions might have obliterated a sizeable chunk of revenues from the secondary offerings business at some banks and that league table ranks bear little relationship to profitability.

Secondary offerings worth more than $9 billion came to market in the first two weeks of December 2004 alone, but despite the evident robustness of investor demand, fierce competition combined with end-of-year league table jostling led to at least two blow-ups. An average estimate from ECM syndicate desks is that Morgan Stanley lost about e22.5 million on its Skr9.8 billion (e1.1 billion/$1.5 billion) accelerated bookbuild in TeliaSonera shares for the Finnish government on December 9.