What’s the collective noun for a large group of equity bankers? To judge by the collapse of WH Group’s initial public offering (IPO) last month, it might just be ‘an incompetence’.
The Hong Kong stock debut of Chinese pork processor WH Group was meant to be a triumphant occasion, with the company following last year’s award-winning takeover of US peer Smithfield with a benchmark Hong Kong stock debut.
Instead the deal collapsed on April 29, having fallen victim to hubris and greed.
It’s easy to see why it failed: WH wanted to issue a lot of shares, and it wanted investor to pay too much for them. The laws of demand and supply did the rest.
Estimates on the exact valuation being demanded vary, but by all accounts the company wanted to get a price/earnings valuation in the mid twenties if at all possible. This was very ambitious, given that direct US rivals traded around 16 times.
The price alone would probably have made WH’s IPO a tough sell. Then the process took another blow ove r the long Easter weekend, towards the end of the marketing process. News emerged that WH had rewarded chief executive Wan Long and head of mergers and acquisitions Yang Zhijun with a combined $600m in shares for conducting the Smithfield acquisition.
Investors flinched. Bankers tried to cut the deal size by more than half in a last desperate effort to keep it on track, but it wasn’t enough. The deal officially foundered on April 29.
WH will not be the last company to blithely overestimate its own importance; corporate greed is hardly a new tale, after all.
But one other factor has been highlighted by this sorry mess: the ridiculous number of banks it hired to support its stock listing. WH decided in its wisdom to hire 29 bookrunners for its deal. That is pretty much every international bank with an equity capital markets presence in Asia.
Banks to blame
Increasingly bloated syndicates have been all the rage on IPOs and G3 bonds in Asia for the past two years, and bankers are quick to moan about the difficulty they add to the marketing process. But there was never any real evidence of any negative impact on the performance of these transactions – until now.
Tales abound that non-senior banks in WH’s syndicate were offering up their own P/E valuation estimates of where its shares should be priced. And the sheer number of banks soliciting orders meant many fund managers were approached multiple times, for different valuation levels.
Banks close to the deal have been quick to blame WH’s management for the deal’s collapse, something that would once have been considered very poor behaviour. The lack of loyalty to the client isn’t particularly surprising. When an issuer hires so many banks, it forces them to split the fee pool so finely that few feel much obligation to execute the deal to the best of their abilities. Instead they tend to appoint junior bankers to do the deal for league table credit alone, and the danger is that no bank takes control of the process.
Blame for this development lies in part with the issuers. They should remember that quantity does not equal quality, and that appointing more participants means each one get less money, and is thus less incentivised to work hard.
But it’s easy to forget that companies looking to list are, in the main, new to the capital markets. And there have been plenty of examples of successful deals that were sold by large numbers of bookrunners. Little surprise, then, if they seek to follow what appears to be normal practice.
Instead it’s the banks that need to take a long hard look at their own priorities, instead of moaning to journalists about the downside of gigantic syndicates from the safety of anonymity.
The fact is league table positioning does matter to them, for all their claims that clients don’t care about it. When equity volumes are down an ECM banker finds it easier to tell his boss that he has built a top three ranking by taking small roles on 10 deals, rather than turning them down because they contained too many other bookrunners.
The banks have to decide whether they are prepared to hold themselves to different standards, namely avoiding deals that have more than perhaps 10 bookrunners and instead seeking out transactions over which they have more control and will get higher fees.
If they won’t do so, they should stop complaining about a situation they are perpetuating. Eventually enough deals will fail that the frailties of the approach become clear.
An incompetence of bankers? More like a hypocrisy.