In the game of initial public offerings, no one doubts that Fidelity Investments is the 800-pound gorilla. The Boston mutual-fund giant is the largest and the most aggressive buyer of IPOs. By using its clout on behalf of investors in its funds, Fidelity gets hefty allotments of hot IPOs and can sometimes influence their prices, say Street sources.
This has created a power struggle between the company and Wall Street's underwriters. Underwriters don't like to be quoted criticizing their best customer, the producer of a huge flow of commissions. But if granted anonymity, they sometimes complain about Fidelity's power. "Fidelity is the one account on the Street with the muscle to push investment banks around," says one underwriter of Fidelity's IPO prowess.
"They're the biggest pain in the ass of all our accounts," says another underwriter. "They hold fast and try to get you to price cheaper." Adds one senior investment banker: "When they say they want 10%, they mean 10%. They don't want to get cut back." Even among institutional investors, Fidelity is in its own league. "Many other big institutions wait to see what Fidelity does before they decide whether to invest," says the CFO mf a biotech company.
Fidelity confirms its primacy in the IPO market. "I would guess that we are probably the biggest buyer of IPOs," picking up about 10% of all new issues, says Richard Spillane, Fidelity's director of research. But Fidelity says that it is basically doing what it can to get the best deal for its shareholders, who are mostly small investors. William J. Hayes, chief operating officer for equity operations, says underwriters set prices and Fidelity just voices its opinions. Says Hayes: "We will challenge them on the price of a deal to keep 'em honest."
The rivalry between the two sides plays out in many ways. Last spring, claim several sources, Fidelity became unhappy with a Merrill Lynch & Co. IPO because it felt the price was too high. When Merrill refused to lower the price, say the sources, Fidelity put Merrill in the "penalty box" by avoiding Merrill deals for a few weeks. Fidelity and Merrill deny the incident occurred. Fidelity's Hayes says: "There could be a [Fidelity] fund manager who likes XYZ Co. but thinks it's priced too high. He might say: 'I'm not going to participate in your next couple of deals.' That's his business."
Fidelity may be simply using its heft to protect the little guy, but as the underwriters see it, the fund giant still weighs 800 pounds and, as the saying goes, can sit wherever it wants.