Blackstone’s IPO Leaves Money on the Table

The Blackstone Group has been the belle of the ball on Wall Street the last couple of days. The private equity group sold off a 13.2% stake to the public last week. The bankers priced the deal at $31 a share, pulling in $4.13 billion for the owners and valuing the entire firm at about $33.5 billion. Co-founders Stephen Schwarzman and Peter Peterson pocketed hundreds of millions, and staff with shares undoubtedly had a good week-end. And it looks like the bankers priced the deal about $4 a share too low, earning themselves a hefty return.

In an ideal IPO where the owners of the private equity get what they deserve, the stock is priced, and that price adequately reflects supply and demand to the extent that the closing price for the day equals the opening price (barring any news affecting the company during the first few hours of trading). To achieve this, the bankers behind the deal have to research the likely demand and compare that to the supply of stock, and price the issue accordingly. The problem is the bankers have no interest at all in doing this.

Instead, they want to get their cut of the issue (the underwriters always get a piece of the action) at a low morning price, in this case $31 a share, and have excess demand so the price goes up immediately. That allows them to book a single day profit, which comes in very handy in calculating bonuses for the end of the year. Blackstone touched $38 a share on Friday before settling at $35.04 a share. That means the bankers took $4.04 that a proper pricing would have sent to the private equity shareholders.

Of course, few of them are complaining. When someone hands over hundreds of millions, one has little incentive to ask about a paltry ten or twenty million extra. Usually, the bankers explain that they need to make a buck on the deal, too, and there’s a lot of truth to that. Nevertheless, they have already loaded up on consulting fees and research charges. Their $4.04 per share in this case was merely extra greed.

There is a huge kerfuffle going on over tax treatment of private firms like Blackstone, and some economic nationalists are all atwitter over the Chinese government taking a 10% slice of the stock. The real issue at hand, though, is the way these deals are structured. While the financial press raved that the IPO was a success, the truth is the bankers put a 10+% discount on the stock at the opening. Messrs. Schwarzman and Peterson aren’t as rich today as they should be.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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