Markit IPO Banks May Reap $1 Billion With Dual Role as Owners

Wall Street banks have long been accused of ignoring conflicts or playing both sides in a deal. That’s not stopping them from both advising Markit Ltd. on its initial public offering and standing to reap as much as $1 billion as owners of the financial-data provider.

Twelve of the 15 banks serving as underwriters for Markit, from JPMorgan Chase & Co. to Bank of America Corp., also are selling shareholders. Ordinarily, the bankers attempt to strike a balance between their fund manager clients -- who want shares to be priced at a discount -- and the issuer that wants the highest price possible. In Markit’s case, the 12 banks will get more than 90 percent of the proceeds, according to data compiled by Bloomberg. Markit isn’t selling shares in the IPO.

Underwriters doubling as shareholders is legal under Financial Industry Regulatory Authority, or FINRA, rules, and the conflict is clearly mentioned in Markit’s prospectus. That doesn’t change the inherent dilemma the banks face in serving two masters. The incentives are tilted toward pricing the shares higher, since the banks could raise a combined $1 billion from the offering, surpassing the millions they would generate in IPO fees, according to Duke University’s James Cox.

“There’s a conflict of interest because they’re pricing based on making a profit on their initial investment instead of what’s a fair price for these shares,” said Cox, a professor of corporate and securities law at Duke in Durham, North Carolina.

Comparative Value

Markit’s stockholders are seeking to raise as much as $1.14 billion in the IPO scheduled to price later today, selling 45.7 million shares for $23 to $25 apiece, according to a regulatory filing June 3. The London-based company’s equity value would be about $4.5 billion at the high end of the range, based on 178.9 million shares outstanding after the offering, the filing shows.

Within this range, Markit is already pitching the IPO at a premium to peers. Based on 2013 profit attributable to equity holders of $139.4 million and using the low end of the marketed range, Markit would debut at 30 times last year’s earnings, according to data compiled by Bloomberg. That’s still 11 percent higher than its most valuable peer, Morningstar Inc., and 38 percent higher than Thomson Reuters Corp., the data show.

Markit, led by Chief Executive Officer Lance Uggla, competes with Bloomberg News parent Bloomberg LP in selling information and data to the financial industry.

Independent Advisers

Markit disclosed the underwriters’ conflict of interest in its prospectus, appointing Jefferies Group LLC as the qualified independent underwriter, since the New York-based firm holds no shares. Rothschild is serving as an independent equity adviser to Markit on the transaction, according to the filing.

Selling shareholders that are also receiving fees as underwriters include Bank of America, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan, Barclays Plc, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, HSBC Holdings Plc, Morgan Stanley, Royal Bank of Scotland Group Plc and UBS AG, the prospectus shows. On average, these firms are selling 38 percent of their stakes in the offering, according to data compiled by Bloomberg.

“It’s up to the buyers to take the premium away, since underwriters haven’t negotiated this thing at arm’s length,” said Bruce Foerster, president of South Beach Capital Markets and co-author of the Capital Markets Handbook, who worked in equity issuance on Wall Street from 1974 to 1994. “They have a perverse incentive to price it at the highest price, instead of the highest sustainable price.”

Representatives for the investment banks declined to comment on the IPO. Markit also declined to comment.

Canada Pension

Still, the profitable company already has lined up a potential buyer of shares in Canada Pension Plan Investment Board, which has indicated interest in investing as much as $450 million to take a 10 percent stake through a private placement, the prospectus shows. Canada’s largest pension fund manager would also nominate a director to the company’s board. Canada Pension declined to comment on Markit’s IPO.

There’s also likely demand for Markit’s IPO from other investors because of its business model and fundamentals, according to Renaissance Capital LLC’s Greg Leffert.

“Markit has a strong position in the financial services industry, and the subscriptions are long, so you have revenue visibility and the renewal rate has been very high,” said Leffert, an analyst at the IPO research firm in Greenwich, Connecticut. “The fundamental strengths will outweigh any of the conflicts.”

Financial Data

The company, whose price data forms the basis for much of the global derivatives and bond markets, posted revenue growth of 10 percent last year to $947.9 million, according to filings. Markit derives half of its revenue from selling financial data such as prices and indexes, with the rest split between processing trades for over-the-counter derivatives, currencies and loans, and the sale of enterprise software platforms. The banks who own and are advising Markit on its IPO also are among the company’s 3,000 customers.

Markit’s not alone in navigating such IPO-related conflicts. Goldman Sachs generated more than $117 million in proceeds from hotel-operator Hilton Worldwide Holdings Inc.’s December IPO as a stakeholder and lender, on top of fees earned as an underwriter on the deal. Aramark, the food-service provider that debuted in December, was owned partially by JPMorgan and Goldman Sachs, both of which served as lead advisers for Aramark’s IPO.

When insiders sell in an IPO, it can send a signal to prospective investors that the owners are cashing out instead of supporting the company’s future potential, Duke University’s Cox said.

“It does leave the image of the rats leaving the sinking ship,” he said.

Before it's here, it's on the Bloomberg Terminal.