Morgan Stanley, Credit Suisse First Boston and the other investment banks that will sell Google shares to the public do not stand to win a fee bonanza, but will make up for in status what they do not receive in compensation.
Fees for the $2.72bn transaction were not disclosed in the regulatory filing released on Thursday. But analysts and people familiar with the transaction have indicated the banks could receive a fee in the 3 per cent to 4 per cent range, or between $82m and $109m.
Google is the most widely used internet search engine. Demand from the public for shares is expected to be huge, and investment banks fought hard to win the right to manage the sale. The fight to manage large IPOs generally results in a lower fee paid by the client.
James Fawcett, global equity capital markets research director at Dealogic, said a 3-4 per cent fee would be in line with industry standards. "Spreads on $1bn-plus US IPOs have averaged 4.3 per cent over the past five years which is significantly below the typical 7 per cent fee seen on smaller deals."
Wall Street loves arranging US IPOs. The transactions generate fees that are usually well above sales of other securities including corporate bond sales, which generally command a 0.9 per cent fee. US IPOs are also more lucrative than those launched in Europe or Asia.
The average fee in Europe last year was about 2 per cent, while the average fee paid for a US IPO was 6.7 per cent, according to Dealogic. In Europe, fees have fallen by up to 60 per cent in the past decade thanks to a fight for market share. Also, US clients are generally more concerned with service than fees, and are often suspicious of discounting. They argue that a company knows if a fee is appropriate only in retrospect.
Banks typically win larger US IPOs by reducing their fees. When CIT Group went public in 2002, it raised $4.86bn and paid Goldman Sachs and Lehman Brothers fees of just 4 per cent.
The largest US IPO ever was the sale of AT&T Wireless. The company paid a 2.9 per cent fee to Merrill Lynch, Goldman Sachs and Citigroup for the $10.6bn sale.
Banks are willing to cut their rates because large IPOs that go off without a hitch typically lead to additional business.
Because Google is using an auction process, the size of the IPO could be larger than the published figure of $2.72bn. That could mean higher fees.