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By Michael Flaherty and Elzio Barreto
HONG KONG, Sept 19 (Reuters) - A recent shouting matchbetween senior bankers involved in Hong Kong's second-largestIPO so far this year illustrates the competitive squeeze onbanks from Chinese companies offering incentives ahead oflucrative initial public offerings.
At a routine Sept. 6 meeting of around 20 underwriters toChina Huishan Dairy Holdings Co Ltd's planned $1.3billion IPO, tempers flared between two bankers from HSBC and Goldman Sachs, said people who were at themeeting and others briefed on the incident. One said the rowescalated to the point where the Goldman banker threatened tohave his HSBC rival fired.
Chinese companies are putting pressure on banks to wooso-called 'cornerstone' investors - big institutional names whoagree to buy shares and hold them, thus boosting the offer'sorder book and profile. To better attract these investors,companies are increasing the incentives to banks that bring themin before the IPO, offering underwriters the promise of biggerfinancial rewards and more prominent roles on the deal.
For the company issuing stock, creating competitive tensionis meant to ensure banks earn their underwriting fees,particularly in a market where banks are starved for choice. Butinvestment bankers say the tactic can backfire, and couldfurther jeopardize an already fragile stock offering market.
IPO volumes in Hong Kong have nearly doubled since last yearto $5.3 billion, but proceeds are well below the peaks of 2-3years ago. Last year was Hong Kong's worst for new listingssince the global financial crisis in 2008.
"You get too many banks appointed on the transactions andthe roles of these banks, and the economics, aren't reallydetermined until a very late stage," said Philippe Espinasse, aformer equity capital markets banker at both UBS and Nomura.
"What happens is you have a whole bunch of banks runningaround trying to get cornerstone orders without anycoordination. They all come to the issuer saying: 'Look whatwe've got. We did more than the others.'"
Bankers shouting at each other is hardly new, and for theHuishan IPO's four joint global coordinators - Deutsche Bank, Goldman, HSBC and UBS - there's as much as$39 million at stake in commissions and incentive fees, ThomsonReuters calculations show.
But for the row to play out as and where it did is rare,said the people who were there.
TOO MUCH CREDIT
At issue was the credit HSBC said it should earn for itsefforts in the cornerstone process compared to the other banks,the people said, noting HSBC had played a significant role inbringing in notable investors.
Typically, such credit can involve a bank being put incharge of investor meetings, a greater financial cut, or playinga lead role in the company's post-IPO stock trading. Accordingto a person briefed on the meeting, tensions were building asbankers felt HSBC was seeking more credit than it deserved.Words were exchanged on the matter by the HSBC banker, promptingthe Goldman outburst.
A second, more junior, HSBC banker joined in and, afterfurther exchanges, she said: "Do you know who my father is? Doyou know who my grandfather is?" That's the kind of talknormally associated with the many so-called 'princelings'employed in the financial industry, although one of thoseinvolved with the IPO said the banker does not have family tiesto China's political elite.
HSBC and Goldman declined to comment. Neither of the bankerswas available for comment. A spokeswoman for Huishan, whichthose familiar with the incident said was not present at themeeting, did not return calls and emails seeking comment.
Huishan on Thursday priced its offer at HK$2.67 per share,at the top of its marketing range, raising $1.3 billion in thesecond biggest Hong Kong IPO so far this year, said a personwith direct knowledge of the deal.
"When business is difficult and there aren't enough IPOsgetting done, obviously it makes it all the more important forbankers to try and grab a piece of any action," said Espinasse.
