U.S. IPOs Fork It Over

U.S. investment banks take home the gold when it comes to charging underwriting fees on IPOs, especially compared to their British counterparts.

But the ability of U.S. bankers to keep commanding top dollar for their labors isn't likely to change anytime soon, even though London bankers are grabbing a larger share of the world market for initial public offerings

A recent English study found that U.S. investment banks charge, on average, a 7% underwriting fee on an initial public offering, compared to a 4% fee for most British banks.

Experts say the big disparity in banking fees stems from the willingness of U.S. companies to pay-up for what they perceive to be top-notch service and star-studded analyst coverage in the aftermarket. They say companies are willing to pay more for a U.S. bank to underwrite a deal, even though Wall Street bankers are not necessarily any smarter than their UK colleagues.

"Hiring an investment bank for an IPO is very much how you would hire a surgeon to a do a cardiac operation," says Brad Hintz, an analyst at Sanford Bernstein. "You don't know anything about cardiac operations, but you are going to hire based on reputation. IPO clients tend not to be price sensitive."

That's a good thing for U.S. bankers because any pressure on them to bring their fees more into line with European firms could crimp profit margins. IPO underwriting fees are a large revenue driver for investment banks such as Goldman Sachs(GS Quote), Bear Stearns(BSC Quote), Morgan Stanley(MS Quote), Merrill Lynch(MER Quote) and Lehman Brothers(LEH Quote).

To view Laurie Kulikowski's video take of this column, click here.