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No Future for IPOs?


Risk in a post-apocalyptic market.

Risk-taking investment banks like Morgan Stanley (MS) and Goldman Sachs (GS) will become staid commercial banks in the post-apocalyptic version of Wall Street.

The basic question: Will a bank holding company roll up its sleeves and back IPOs for companies with great promise and no track record?

Probably not because many new issues are little more than a business plan, an injection of venture capital and hope for future glory with new products or services for a small, but growing market or a market that doesn't yet exist.

Minyanville's Why Wall Street Will Never Be the SameIrv DeGraw, a finance and banking professor at St. Petersburg College in Florida, says:

""An investment bank linked to a traditional bank appears to make underwriting more conservative. Citigroup (C) and Bank of America (BAC) continue to do deals, but they're not all that exciting. Alex Brown used to do about 30 mid-sized but solid IPOs every year. Then Deutsche Bank bought them, and the deals all but disappeared. The different cultures of an investment bank and a traditional bank have never been compatible."

When launching an IPO, an investment bank's duties include due diligence, valuation, road show promotion, buying the shares and distributing them to investors. The lead underwriter makes a market for the newly issued stock and provides liquidity, serving much like a New York Stock Exchange specialist. These functions can't be handled by a venture capitalist looking for an exist strategy.

"We could see the re-emergence of the boutique investment bank," DeGraw says. "We could also see the internationalization of the IPO market and it could become headquartered in London rather than New York."

Perhaps the boutique investment banks would handle the innovative companies and the larger underwriters linked to traditional banks would handle the deals from traditional companies in established sectors such as oil field services or tankers.

If up-and-comers in new fields can't tap the equity markets to expand, what does that mean for American innovation and Wall Street's continued preeminence in finance?

If one of the protobank holding companies had reviewed the prospects of Microsoft (MSFT), it's not difficult to imagine the equity managers snorting, "The market for personal computers doesn't exist and probably won't due to high cost to the consumer. This means there will be no significant market for the company's products and its prospects for success are close to zero. Pass."
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