TCS Daily

No Change in the Pecking Order

By John E. Tamny - January 16, 2004 12:00 AM

The end-of-year Merger & Acquisition league tables were reported on in last month's Wall Street Journal. The story by Anita Raghavan was mostly unremarkable; the major news being that while M&A activity has picked up, it's still down 57% from what it was three years ago.

That Goldman Sachs was at the top of the rankings was also unremarkable in that they often hold one of the top spots, along with firms two, three, and four in the rankings: Credit Suisse First Boston, Morgan Stanley, and Citigroup. Still, the news jumped out at me.

It took some thinking, but then I remembered why these otherwise humdrum rankings were so significant. To understand, one has to go back to October of 2002. At the time, investment banks were suffering through a crippling bear market for stocks, and worse, they, as opposed to mutual fund companies, were the targets of the politically ambitious attorney general from New York, Eliot Spitzer.

As the stock market was bottoming, Spitzer's reputation (and political star) was soaring. Indeed, he was nearing a major settlement with investment banks after "discovering" a long-known (and often very productive) conflict between investment banking and research, and in unearthing the latter, the "people's lawyer" happened upon initial public offering allocations.

By his lights, executives such as Worldcom's Bernie Ebbers had made excessive profits in a "rigged" IPO market; the explicit accusation being that investment banks had provided generous technology IPO allocations to executives in exchange for their investment banking business.

Spitzer was actually proven right to a small degree, in that very definitely top executives like Ebbers, Ebay's Meg Whitman, Yahoo's Jerry Yang, and others had been the perfectly legal recipients of generous IPO allocations from some of the top investment banks. End of story? Not so fast.

Sensing an opportunity, Spitzer ascribed sinister motives to the allocations, claiming that the uncertain promise of quick, five to six figure profits actually influenced corporate chiefs as to which investment bank they would choose when deals arose.

The notion that members of the Forbes 400 could be swayed by IPO profits that are microscopic relative to their net worth was never questioned by a mostly fawning press. His reputation rising, Spitzer continued to search for "malfeasance" in the financial world, eventually settling on mutual funds, where he is today.

Unhappily for Spitzer, the results are in, and the above-mentioned M&A league tables make a mockery of his past and present assertion that hot IPO allocations sway executives "who are in a position to greatly influence investment banking decisions."

Why is this? Well, as anyone who's been following stocks knows, there hasn't been much of an IPO market to speak of in recent times. Excepting an occasional mortgage company or REIT, the IPO market has been mostly quiet for the last couple of years as institutions lost their appetite for anything but the most prosaic of offerings. Google is expected to file sometime soon, but even the excitement over it has not led to a rash of new technology IPOs.

For those who think like Spitzer, the logical result of the IPO meltdown would have been a change at the top of the investment banking pecking order. Again, by his estimation companies weren't choosing investment bankers based on merit, but for the little goodies that could be thrown their way. Absent those goodies, surely the Goldmans of the world would fall off of their lofty perches?

In fact, the investment banks most synonymous with the past technology boom are still on top. How could that be? Indeed, Citigroup, for so long tarred by former star analyst Jack Grubman is #4 in the rankings, tech cheerleader Mary Meeker's Morgan Stanley is #3, CSFB is #2 without notorious IPO allocator Frank Quattrone at the helm in Silicon Valley, while tech giant Goldman Sachs is still number one.

What the facts seem to be telling us is that CEO's and top executives hire the best investment bankers, plain and simple. Not surprisingly, the most intriguing private companies in the world often chose those same top bankers when the former chose to go public. While we're at it, I would venture to say that the reason analysts so often did (and continue to) have high ratings on companies that are investment banking clients is a self-selecting one too: neither analysts nor investment bankers want to cover anything but the best companies. Only a regulator or a nearly career politician could think otherwise, and sadly Eliot Spitzer's thoughts have had a pretty major body count for Wall Street.

Here's hoping the bulge bracket investment banks choose to publicize the latest rankings, and in the process, chip away at Spitzer's ill-gotten credibility. Ideally mutual fund companies will be emboldened by the hoped-for willingness of investment banks to stand up for themselves, and will maybe do the same.

John Tamny resides in Washington DC and can be reached at


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