Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

(Updated )

A boutique U.S. financial firm has just nailed the most coveted investment banking advisory job in the Middle East. That's bad news for all the traditional shops, like Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Deutsche Bank AG.

It doesn't mean they've missed out entirely -- they're still likely to get underwriting gigs. However, by hiring New York-based Moelis & Co. to advise on its mega IPO, Saudi Arabian Oil Co. can really start turning the thumb screws.

It's a similar strategy to the one adopted by Brazil's Petroleo Brasileiro SA in 2010, when it raised $70 billion via a share sale. Petrobras hired Rothschild & Co. as an adviser, a fact that also came out early on in the process. The list of underwriters for the deal itself was lengthy: Bank of America Merrill Lynch, Banco Bradesco SA, Banco do Brasil SA, Citigroup, Itau BBA, Morgan Stanley, to name a few.

Apart from making sure bankers on the various desks talked to each other instead of stepping on toes, Rothschild was tasked with making sure Petrobras got maximum bang for its buck. If you want to squeeze an investment banker, hire one to do the job.

It worked. Fees for Petrobras's IPO averaged about 0.65 percent of the amount raised, according to data compiled by Bloomberg. Any equity syndicate manager will tell you that's rock bottom, considering the size and complexity of the transaction, which also involved convincing Brazil's congress to approve an equity-for-oil swap. To get a sense of how cheap, it was the lowest charge for any equity offering in Latin America that year. The next least expensive deal for which data is available was double that.

Pay Peanuts, Get Bankers
Petrobras paid super low underwriting fees even though its float was one of the most complicated in Latin America's history
Source: Bloomberg
* Data refers only to Latin American initial and secondary offerings for which there is fee data.

Sure, against $70 billion, that's still $455 million. But I remember talking to bankers after the transaction and their frustration was clear. Apparently, Rothschild also came up with a reward system that allocated fees according to orders booked. So a small, local bank that happened to bring in a lot of business ended up being better rewarded percentage wise than an international lead underwriter.

You can be sure Moelis will be considering a similar course of action. After all, what it gets paid by Aramco will depend upon how good its own negotiating skills are.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(An earlier version of this column corrected a calculation in the sixth paragraph.)

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Christopher Langner in Singapore at

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