Some analysts have claimed Internet IPOs, led by a new breed of “virtual” investment banks, pose a threat to traditional investment banks, which currently earn over half their revenue in the US from underwriting IPOs.
Jeffrey Wecker, a senior vice president at Lehman Brothers, told a Euromoney seminar in London that his virtual competitors lacked the “star quality” and banking experience that issuers want.
Mr Wecker concedes that Lehman and other traditional banks will lose revenue out of the IPO transaction to virtual investment banks or face downward pressure on their existing fee levels; but believes they can make up the shortfall by focussing on the post-IPO needs of issuers.
Advertising upcoming IPOs and distributing allocated shares over the Internet is a “commodity business”, he told participants. Virtual investment banks benefit from having fewer bricks-and-mortar overheads, so they can easily undercut their established rivals when it comes to the mechanics of a new issue. But issuers need help with more than the mechanics; and, according to Mr Wecker, investment banks will continue to command a premium for the expert, advisory services that meet these additional needs.
In fact, he reckons that unless virtual banks use their current high market valuations – certain to fall as the Internet IPO market matures – to poach “star” bankers from competitors, they face a bleak future of low margins and eventual extinction.
Mr Wecker, who leads the e-commerce group in Lehman's global equities division, focussed his remarks mainly on the US, where the Internet IPO market is well established, but believes the issues are the same for the European arms of the major banks.
A number of virtual investments banks, including Swedish start-up EPO.com, which has already successfully carried out a number of online IPOs for its domestic market, are only now developing a pan-European capability.
In the US, e-distribution already accounts for 18% (or $30.8 billion) of all primary and secondary issues.