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The Underwriters

We have described underwriters as playing a triple role ¤providing advice, buying a new issue from the company, and reselling it to investors. Underwriters don`t just help the company to make its initial public offering; they are called in whenever a company wishes to raise cash by selling securities to the public.

Most companies raise capital only occasionally, but underwriters are in the business all the time. Established underwriters are careful of their reputation and will not handle a new issue unless they believe the facts have been presented fairly to investors. Thus, in addition to handling the sale of an issue, the underwriters in effect give it their seal of approval. This implied endorsement may be worth quite a bit to a company that is coming to the market for the first time.

Underwriting is not always fun. On October 15, 1987, the British government finalized arrangements to sell its holding of British Petroleum (BP) shares at Р’Рі3.30 a share. This huge issue involving more than $12 billion was underwritten by an international group of underwriters and simultaneously marketed in a number of countries. Four days after the underwriting arrangement was finalized, the October stock market crash occurred and stock prices nose-dived. The underwriters appealed to the British government to cancel the issue but the government hardened its heart and pointed out that the underwriters knew the risks when they agreed to handle the sale.7 By the closing date of the offer, the price of BP stock had fallen to Р’Рі2.96 and the underwriters had lost more than $1 billion.

WHO ARE THE UNDERWRITERS?

Since underwriters play such a crucial role in new issues, we should look at who they are. Several thousand investment banks, security dealers, and brokers are at least sporadically involved in underwriting. However, the market for the larger issues is dominated by the major investment banking firms, which specialize in underwriting new issues, dealing in securities, and arranging mergers. These firms enjoy great prestige, experience, and financial muscle.

Table 5.11 lists some of the largest firms, ranked by total volume of issues in 1998. Merrill Lynch, the winner, raised a total of $304 billion. Of course, only a small proportion of these issues was for companies that were coming to the market for the first time.

Earlier we pointed out that instead of issuing bonds in the United States, many corporations issue international bonds in London, which are then sold to investors outside the United States. In addition, new equity issues by large multinational companies are increasingly marketed to investors throughout the world. Since these securities are sold in a number of countries, many of the major international banks are involved in underwriting the issues. For example, look at Table 5.12 which shows the names of the principal underwriters of international issues in 1998.

7 The government`s only concession was to put a floor on the underwriters` losses by giving them the option to resell their stock to the government at Р’Рі2.80 a share. The BP offering is described and analyzed in C. Muscarella and M. Vetsuypens, ¬The British Petroleum Stock Offering: An Application of Option Pricing, ­ Journal of Applied Corporate Finance 1 (1989), pp. 74 Ј80.

Internet Shares: Loopy.com?

The tiny images are like demented postage stamps coming jerkily to life; the sound is prone to break up and at times could be coming from a bathroom plughole. Welcome to the Internet live broadcasting experience. However, despite offering audio-visual quality that would have been unacceptable in the pioneering days of television, a small, loss-making company called Broadcast.com broke all previous records when it made its Wall Street debut on July 17th.

Shares in the Dallas-based company were offered at $18 and reached as high as $74 before closing at $62.75 ¤ a gain of nearly 250% on the day after a feeding frenzy in which 6.5m shares changed hands. After the dust had settled, Broadcast.com was established as a $1 billion company, and its two 30-something founders, Mark Cuban and Todd Wagner, were worth nearly $500m between them.

In its three years of existence, Broadcast.com, formerly known as AudioNet, has lost nearly $13m, and its offer document frankly told potential investors that it had absolutely no idea when it might start to make money. So has Wall Street finally taken leave of its senses?

The value being placed on Broadcast.com is not obviously loopier than a number of other gravity-defying Internet stocks, particularly the currently fashionable ¬ portals ­ ¤ gateways to the Web ¤ such as Yahoo! and

America Online. Yahoo!, the Internet`s leading content aggregator, has nearly doubled in value since June. On the back of revenue estimates of around $165m, it has a market value of $8.7 billion.

Mark Hardie, an analyst with the high-tech consultancy Forrester Research, does not believe, in any case, that the enthusiasm for Broadcast.com has been overdone. He says: ¬ There are no entrenched players in this space. The Ёold` edia are aware that the intelligence to exploit the Internet lies outside their organizations and are standing back waiting to see what happens. Broadcast.com is well-positioned to be a service intermediary for those companies and for other content owners. ­ Persuaded?