Alibaba Hands Out Generous Fees To Investment Banks Involved In Its IPO

2.50
Trefis
CS: Credit Suisse logo
CS
Credit Suisse

Given the size of Alibaba’s (NYSE:BABA) long-awaited IPO, the banks and brokerages that worked in it no doubt expected handsome fee revenue from the Chinese e-commerce giant in return for their services. [1] But when the better-than-expected market response to the offering made it the world’s largest IPO, the company was happy to announce an additional incentive fee of $50 million for its lead bankers – bringing the total fees to an unprecedented $300 million. [2] Given that the IPO raised $25 billion, this represents total fees of 1.2% of the offering size. To put things in perspective, Facebook (NASDAQ:FB) handed out $175 million in fees for its $16-billion IPO, or a fee of 1.1% (see Banks Earn Nice Facebook Fees Despite Shares Trading Lower Post IPO). Equity underwriting fees as a percentage of deal size generally falls with an increase in the value of the deal, which is why Alibaba’s  compensation package is a windfall for the banks.

Notably, Alibaba chose a different approach for splitting the fees, rather than pursuing the usual practice of giving each bank a pre-determined proportion of the fee pool. It gave each of the five lead bankers — Morgan Stanley (NYSE:MS), Credit Suisse (NYSE:CS) Deutsche Bank (NYSE:DB), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) — a 15.7% share of the $250-million base fee, followed by a 7.9% share to Citigroup (NYSE:C). [3] The remaining 13.6% was shared by 28 lower-tier underwriters. The $50-million incentive fee was shared only by the six main banks in proportion to their involvement in the deal.

See our full analysis for AlibabaMorgan StanleyJPMorganGoldman Sachs| Credit SuisseDeutsche BankCitigroup

Relevant Articles
  1. What To Expect From Credit Suisse Stock?
  2. What To Expect From Credit Suisse Stock?
  3. Where Is Credit Suisse Stock Headed?
  4. Credit Suisse Stock Missed The Street Expectations In Q3, What To Expect?
  5. Is Credit Suisse Stock Attractive At The Current Levels?
  6. Credit Suisse Stock Lost 21% Last Week, What’s Next?

Instead of following the convention of naming banks to the roles of a lead manager, lead underwriters and co-managers, Alibaba jointly appointed six banks to run its IPO with each bank being assigned a specific task. This is why it split the base fee of $250 million equally among the banks (except for Citibank which got a lower figure). The company was much more discerning with its bonus fee of $50 million, though, choosing to pay the banks based on their actual roles as well as the costs each bank incurred in the process.

While Credit Suisse and Morgan Stanley were each awarded 22.5% of the bonus fee, Goldman Sachs and JPMorgan pocketed an 18% share each, while Deutsche Bank and Citigroup got 10% and 9% of the figure respectively. [4] The table below summarizes the total fee revenues for each of these six banks from the Alibaba IPO:

Bank Share of Base Fee Actual Base Fee Share of Bonus Actual Bonus Total Fees
Morgan Stanley 15.7% $39.3 mil 22.5% $11.3 mil $50.5 mil
Credit Suisse 15.7% $39.3 mil 22.5% $11.3 mil $50.5 mil
Goldman Sachs 15.7% $39.3 mil 18% $9.0 mil $48.3 mil
JPMorgan 15.7% $39.3 mil 18% $9.0 mil $48.3 mil
Deutsche Bank 15.7% $39.3 mil 10% $5.0 mil $44.3 mil
Citigroup 7.9% $19.8 mil 9% $4.5 mil $24.3 mil

Notably, these six banks pocketed $266 million in total fees from the IPO – an 89% share of the $300 million in total fees paid by Alibaba. Morgan Stanley and Credit Suisse gained the most with revenues of $50.5 million each. While Citigroup had to contend with a lower fee revenue compared to its peers, we believe that the globally diversified banking group will more than make up for the shortfall over coming years thanks to its appointment as the depository bank for Alibaba’s ADR (American depository receipts) program.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Alibaba IPO ranks as world’s biggest after additional shares sold, Reuters, Sept 22 2014 []
  2. Alibaba Gives Bigger Incentive Fees to Credit Suisse, Morgan Stanley, The Wall Street Journal, Sept 26 2014 []
  3. Alibaba’s Banks Boost IPO Size to Record of $25 Billion, Bloomberg, Sept 22 2014 []
  4. Alibaba Said to Pay IPO Banks $50 Million Incentive Fee, Bloomberg, Sept 26 2014 []