On 27 January 2011, the Office of Fair Trading (OFT) published its market study on equity underwriting.
The OFT announced the proposed market study, by way of an initial consultation on its scope, in June 2010. This followed expressions of dissatisfaction in early 2010 by companies and institutional shareholders with equity underwriting services including, in particular, increases in underwriting fees and discounts on rights issues. The OFT set out the final scope of the market study in August 2010. The study examined equity underwriting services for different types of secondary issue by FTSE 350 listed companies.
The publication of the OFT market study follows the recent report of the Rights Issue Fees Inquiry on the practices and pricing procedures in pre-emptive offerings of UK equity securities (see our December 2010 E-Bulletin article: The Rights Issue Fees Inquiry publishes its report on practices in UK rights issues).
The market study found that average fees rose to more than 3% in 2009 from around 2 to 2.5% in the period from 2003 to 2007. While such increases can be explained in part by increased levels of volatility and risk, the OFT states that its analysis suggests that fees and discounts on rights issues have been slow to fall in line with subseqent reductions in risk.
The market study found that companies typically lack regular experience of raising equity capital. Moreover, companies are generally less focussed on the cost of equity underwriting services and tend to be more focussed on speed, confidentiality and a successful "take-up".
The market study suggests a number of options to assist companies and institutional shareholders in achieving more cost effective outcomes. It suggests that companies could consider using competitive tendering among banks with whom they have relationships and could generally seek to put greater pressure on fees. It also suggests that companies could seek to mitigate the knowledge and experience gap by seeking advice from those with more experience of the process. Institutional shareholders could put greater pressure on companies to seek lower fees and discounts and could commit to sub-underwriting issues before they are announced (and accept lower sub-underwriting fees for so doing).
In light of its findings, the OFT has provisionally concluded that it would not be appropriate to make a market investigation reference to the Competition Commission.