Thursday, June 14, 2007

Blackstone's IPO Underwriting Strategy: Silence The Street

"Bribe" is an ugly word. So I'm not going to use it again in this post.

I read yesterday that Blackstone has employed 17 Wall Street investment banking houses in its IPO process. Even, according to the Wall Street Journal article by ',' Goldman Sachs. The latter was originally snubbed for having worked on another private equity shop's IPO.

Additionally, it is alleged that Chase was allowed in, despite its having backed a competing bidder for Equity Office Properties, a recent Blackstone purchase.

To quote the Journal article,

"But perhaps Blackstone has another motive. By bringing everyone on board, it may keep criticism of its trumpeted $33 billion-plus valuation at a minimum. This is particularly important for, say, Goldman, whose own stock trades at a whopping price-to-earnings discount to Blackstone's implied valuation.

Yet, behind closed doors, it's widely believed that those who publicly criticize Blackstone's value won't be invited to sell its IPO. Looks like Wall Street opted to keep its collective mouth shut."

You think?

This is unquestionably the motive for Blackstone's hoovering up any party whose credible scepticism about its IPO valuation might cause investors to balk. The effect is to mute all sell-side criticism. Then you have the unstated silence of anybody else with a trading desk, who hopes to broker any of Blackstone's order volume in this lifetime.

You can search my blog for posts on Blackstone's IPO. For starters, however, read this one, from April.

In this post, I wrote,

"What I find amazing, however, is that investors are lining up to buy shares of an entity in which they can't even measure risk levels. Essentially, they are buying income 'participation shares,' much like I advocated last year in this post regarding corporate governance and takeovers. But, rather than retaining interest in a previously-public firm, they are buying the equivalent of a blind pool.

In a very real sense, Schwarzman has created the best of both worlds- retaining total control and privacy of operations, while establishing a value for the firm, and cashing out while doing it.

Honestly, I have even more respect for him now than I did before. Not that I would be on the other end of an equity transaction from him. And, correspondingly, I have less respect for the investors who buy the Blackstone IPO shares."

I can only reiterate my earlier sentiments. As I said to my partner over lunch yesterday,

"Who would be foolish enough to be on the other side of an equity deal from Goldman or Blackstone?"

I own Goldman in my equity portfolio now. But I only bought it in January, not as an IPO. As such, it is market-valued now, not seller-valued.

With all the hoopla on Capitol Hill this week regarding new taxes for carried interest income in private equity deals, and Schwarzman's $700+MM payday, and $7B interest in Blackstone, the real danger is overlooked.

I contend it is this pervasive, collaborative silence on Wall Street, as it collectively abets Blackstone in valuing its IPO.

Alas, no amount of legislation will ever remedy this. No, for this, we have to trust people to use their common sense. To think.

And that brings me to an old story about the former Governor and Senator from my home state of Illinois, Adlai Stevenson.

When running in one of his campaigns for President against Eisenhower, it is said that Stevenson was approached by a woman who gushed,

"Governor, you have the vote of every thinking American."

Stevenson, perhaps apocryphally, is said to have replied,

"Oh, Madam, I'll need many more votes that that to win the election."

Caveat Emptor, indeed!

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