Westcomb

d.o.g.
Junior Member
Posts: 78 Registered: 3-1-2005 Member Is Offline
posted on 10-5-2005 at 07:16 PM

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How do they earn money from underwriting IPO?

There are 2 components in the fund-raising portion of an IPO. The first part is the "roadshow" - the promoter goes out canvassing for investors to buy up the placement shares. It earns a fee for this marketing effort. The second part is the underwriting. The promoter may or may not choose to underwrite the issue. If it does underwrite the issue, it earns a separate commission, usually a percentage of the money raised by the company. There's usually a fixed minimum for the fee charged, which is why some small companies end up paying a large percentage of the funds raised to the underwriter.

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My rudimentary understanding from the term "underwriting" is to bear the undesirable consequence on behalf of the insured for a fee.What does it mean in the case of underwriting for IPO?

An underwriter for an IPO guarantees the company (the insured) against a failure of the IPO (undersubscription for the shares being offered). If the underwriter cannot find enough buyers for all available shares, it has to buy any excess shares itself. Thus the company itself is protected against the possibility of a failed IPO. This risk has been transferred to the underwriter.

A good example of the underwriter being called upon would be Chartered Semiconductor's failed rights issue a couple of years back. Merrill Lynch chose to underwrite the issue, and when the rights issue failed, Merrill Lynch had to buy up all the unsubscribed rights and exercise them, becoming a shareholder of Chartered. Ultimately the share price of Chartered rose enough that Merrill Lynch managed to dispose of the shares and come out ahead, but it illustrates the risks involved with being too hungry for business.

Normally the promoter will underwrite an IPO only if it's confident it can sell all the shares, or if it's desperate for business. Naturally, an underwritten IPO commands higher fees than a non-underwritten one, otherwise nobody would take on the additional risk. If the issue is large, there may be more than one underwriter, and the risks and fees are shared accordingly.

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d.o.g.
Junior Member
Posts: 78 Registered: 3-1-2005 Member Is Offline
posted on 10-5-2005 at 08:58 PM

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The marketing of the issue is being carry out together by a public relation company and a investment/capital company. In westcomb case is actually taken by "Westcomb Capital" and "Quattro Media". Where both earn commission base on a pre agreement amount. It is so?

I was writing in general terms and was not referring specifically to Westcomb. However it would not be surprising that the marketing is being done by 2 separate companies under a common owner. This allows the IR/PR and promoting/underwriting companies to operate independently of each other and potentially capture additional business on their own.

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So most of revenues earn from IPO by "Westcomb Capital " actually come from:Pre- IPO --- Teaching and leading a company to become a listed company.Post - IPO --- What kind of services is needed here???

For the IR/PR company:

Pre-IPO Services:
1. marketing via roadshows, TV/press coverage
2. development of corporate IR website

Post-IPO services:
1. press releases
2. answering simple questions from the public
3. maintenance of corporate IR website

For the promoting/underwriting company:Pre-IPO services:
1. assistance with share registration
2. restructuring of shareholdings
3. creation of nominee accounts
4. ensure compliance with listing rules
5. marketing via roadshows, TV/press coverage

Post-IPO services:nil
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That's more or less it, in a nutshell. It should be clear that the investment banking arm generates the bulk of the revenue, but it's all one-off. Only the IR/PR business has consistent revenue, but it's peanuts. That's why Westcomb has a capital markets licence - so that it can operate its own pre-IPO fund to generate additional profits, or so it hopes.

Westcomb also has a stockbroking licence, to provide additional share-related services like nominee services, (maybe) margin lending etc. This will allow it to squeeze a few more dollars from its existing clients. It's always cheaper to extract more cash from your current clients then to acquire a new client. Westcomb's growing array of services is probably following this line of thought.

It's true that IPOs (which are one-off in nature) apparently constitute only 1/3 of revenue, but keep in mind that the so-called ECM and stockbroking activity that makes up half of revenue is also one-off. How many times can any one company raise debt or sell equity? How much can you earn on stockbroking fees when you don't cater to the mass market or private banking clients? Think about it. This company's true recurring revenue is only the PR and fund management activity - just 7% of revenue.As usual, the standard disclaimers apply.

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d.o.g.
Junior Member
Posts: 78 Registered: 3-1-2005 Member Is Offline
posted on 11-5-2005 at 10:44 AM

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The main question is as to whether the 12.3M revenue from"Securities trading and ECM syndication" is composed mainly of IPO related activity.Sage and d.o.g do not seem to think so.

To be more accurate, I'm not really concerned as to whether securities trading and ECM syndication consists mostly of IPO-related activity. What I am concerned about is that whether IPO, listed company or private equity, ALL investment banking activities are non-recurrent in nature. In other words, Westcomb's business is highly volatile. There is no such thing as a regular customer - every customer is new.

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this company HAS consistently increased revenue and profits over the past four years by generating new clients not from increasing recurrent income - so maybe they are good at it?

They may have been good the past 4 years, but unfortunately the past is no guide to the future. The recent past is a reasonable glimpse of the future only when business conditions are assumed to be stable. But without regular customers and most of its business from China (hardly a stable environment), is there any predictability?

The second weakness of Westcomb is poor scalability. There is a human limit to the number of deals each team can do. Beyond that you just need more bodies.

And Westcomb can't go for bigger deals per team - Choo Chee Kong himself admitted that they are limited to deals of a certain size (either $30m or $100m IIRC). Beyond this the companies will go straight to the big boys.So while the numbers look good (as with almost all professional services companies) Westcomb is held back by 2 fundamental weaknesses in its core investment banking business:

1. Revenue is one-off in nature; and
2. Poor scalability.

And of course to top it off China's new SAFE-related regulations have dammed the flow of deals, so the future is murky to say the least.

There's a good reason why most investment banks also house proprietary trading desks or live under the wing of a commercial bank - investment banking earnings are just too volatile for the business to survive independently.

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d.o.g.
Junior Member
Posts: 78 Registered: 3-1-2005 Member Is Offline
posted on 12-5-2005 at 11:23 AM

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unlock
westcomb become something like Morgan stanley or Price Water house Coopers

g18
It takes a very long time to build up a franchise and brand name like Morgan Stanley.

Morgan Stanley's current troubles also illustrate that:
1. Reputation is THE key asset, but it can be destroyed easily by a few bad moves; and
2. I-banking is tremendously dependent on key staff (rainmakers). If they leave, the business follows them.

Westcomb is similarly dependent on its team leaders and Choo Chee Kong's reputation and contacts from his time at DBS. If any staff conflicts arise, the teams will be weakened and clients will be scared off. There are many small i-banks even in Singapore - just look at who's been bringing IPOs to market lately.

And apart from the boutique i-banks you still have the larger full service i-banks backed by banks and financial institutions. So IMHO Westcomb is walking a tightrope. So far, so good - but it's always going to be a tightrope - with no safety net below.