By Dow Jones Business News, October 29, 2013, 08:45:00 PM EDT
When Twitter Inc. executives came to town last week, J.P. Morgan Chase & Co. executives mingled outside their offices
while wearing jackets with the social-media company's bird logo. Morgan Stanley flashed "Welcome @Twitter to @Morgan
Stanley" on a Times Square ticker. Goldman Sachs Group Inc. tweeted a photo of Twitter's logo taken at the securities
It was worth it. The three Wall Street firms are set to collect a total of $37.2 million in fees as underwriters of
Twitter's initial public offering next week, according to people familiar with the matter.
The seven financial firms hired to pitch the $1.6 billion deal will get a combined $49 million if the shares slated to
be sold go for $20 apiece, or the top of their projected price range.
Goldman Sachs's likely fee of $20 million as the IPO's lead underwriter amounts to less than one day of revenue for
the securities firm. But there are lots of other ways that Wall Street can profit from the IPO.
The fees are largely compensation for banks tapping their client lists to find investors for the deal and for the
labor involved in getting companies prepared for filings with regulators and meetings with investors during the "
roadshow" that precedes the final IPO pricing.
Right now, Twitter executives are traveling around the U.S. to pitch to investors. They began meeting with firms in
Baltimore and made a stop at a Ritz-Carlton in Philadelphia, according to people familiar with the meetings. Twitter
executives were in New York on Tuesday meeting with firms and will host a wider group of investors at a lunch at the
Mandarin Oriental in Manhattan on Wednesday, these people said.
Other stops include Boston, Chicago, Denver, Los Angeles and San Francisco, according to a marketing document. The IPO
is expected to price Nov. 6, the document said.
The fees will come in the form of a slice of the proceeds from the money raised in the IPO. But that isn't the end of
the potential payback for working on the deal. There will be potential trading commissions from investors and wealth-
management clients who come to the banks to help them buy stock once it begins trading, commissions from firms that
trade with the bank to get access to the research reports expected to be published when a regulatory quiet period ends
after the IPO, and any fees from new deals banks might land based on potentially enhanced reputations.
"Each IPO by itself might seem like it's a small fee. But if a banker has been selected to do Twitter, they're more
likely to get the next deal," said Reena Aggarwal, finance professor at the McDonough School of Business at Georgetown
Also, amid the stricter regulatory environment since the financial crisis, IPOs have a fresher appeal for banks. The
deals don't require taking proprietary trading positions, which means they would be largely unaffected by the "Volcker
rule," which is still being finalized and intends to bar banks from making certain bets on their own behalf.
IPOs also don't require banks to hold big amounts of capital to cover potential losses, like some transactions do,
because the banks don't hold the shares for more than a moment as they are passed from the company to the investors
Underwriting stock sales is one of banks' better businesses in terms of profitability, according to Brad Hintz, an
analyst at Sanford C. Bernstein.
Bernstein research showed that investment banks take home more than 40% of the revenue generated by equity
underwriting, which includes IPOs and other stock offerings, as profits, before taxes. That is in line with merger-and-
acquisitions advisory work and far more than debt underwriting, which has a pretax margin of less than 10%, even though
bond deals are a much larger business overall.
IPOs also tend to be major milestones for a company at a critical time in their growth and important life events for
company executives who may become millionaires or billionaires on the day. The red-carpet treatment the companies get
during this time helps burnish the banks' reputation with these individuals for future dealings.
"If you're the lead firm on an IPO...you're spending a lot of time with management. You form a very close
relationship, and if you don't totally screw up, you build a good relationship for the future," said David Topper, a
former senior IPO banker who is now an operating partner at private-equity firm General Atlantic LLC.
To be sure, IPOs aren't guaranteed to produce follow-up work, especially if the shares don't trade well in the open
market. Banks sometimes drop research coverage if the stock is only lightly traded.
And companies don't always immediately produce a lot of deal flow. Facebook Inc., whose deal was led by Morgan
Stanley, saw its shares fall after their debut before trading above the IPO price more than a year later. The company
has yet to return to the market with any follow-on offering or to pay big fees to a bank on deals it already has
announced, according to public documents.
The banks in the Twitter deal are expected to collect 3.25% of the money raised overall in the IPO. Goldman Sachs,
which began working with Twitter when it confidentially filed for its IPO in July, will receive the bulk of the fees, or
38.5%, people familiar with the matter said. Morgan Stanley is set to get 18% of the fees, and J.P. Morgan Chase is in
line for 15%, the people said. Bank of America Corp.'sBank of America Merrill Lynch and Deutsche Bank AG are slated for
8% each. Boutique Allen & Co. is to earn 7% and Code Advisors 0.5%.
Twitter has set aside about 5% of the fee pool as additional incentive fees, which in IPOs typically go to lead banks
if they are paid out.
Write to Telis Demos at firstname.lastname@example.org
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