3.9 Advisors to manage the flotation, called the Global Coordinators, were appointed jointly by the Department, Carlyle and QinetiQ through a robust competitive process. Seven banks were shortlisted from a field of twelve and were asked to respond to a detailed questionnaire on their approach to valuing and presenting the company to investors. As part of the competitive process, they were also asked to amend the draft underwriting agreement33 provided to them. Advisors were scored across several areas including their understanding of the business, their ability to distribute the shares and run an efficient flotation, the strength of the team, and their proposed fee.
3.10 The Department, Carlyle and QinetiQ elected to appoint another advisor to provide independent financial advice in relation to the advice provided by the Global Coordinators. This decision was taken to avoid the potential conflict of interest arising from banks advising on the form of the offer when their fee was linked to this. As a result banks were asked to bid on the basis of providing independent advice, for a fixed fee, as well as coordinating the offer.
3.11 Three banks were appointed as joint Global Coordinators, and a fourth bank appointed to provide independent advice and critique the Global Coordinators' approach. The agreed fees were in both cases the lowest quote provided across the field of bidders. ABN AMRO
12 | The commission for the QinetiQ flotation was higher than in past privatisations but in line with market practice | ||||
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Company | Date | Type | Size of offer (£ million) | Total Commission (%) | |
Private Co. A | mid 2005 | Flotation | 993 | 3.8 | |
Private Co. B | mid 2005 | Flotation | 702 | 4.0 | |
Private Co. C | mid 2005 | Flotation | 403 | 3.5 | |
British Energy | July 1997 | Privatisation | 1,400 | 1.25 | |
Railtrack | May 1996 | Privatisation | 1,916 | 1.5 | |
QinetiQ | February 2006 | Privatisation | 650 | 2.5 | |
Source: National Audit Office and Simmons & Simmons analysis | |||||
Rothschild were paid a fixed fee of £1 million for advising and the Global Coordinators - Credit Suisse, JP Morgan Cazenove, and Merrill Lynch - were paid a commission of 2.5 per cent of the gross proceeds of the offer, 1.75 per cent of which was discretionary; all fees were paid jointly by the Department, Carlyle and QinetiQ.
3.12 The Department's analysis of recent flotations showed the commission to be towards the lower end of the range. The percentage agreed was higher than paid in previous privatisations (Figure 12) when commissions generally were much lower, at two per cent. Moreover, at the time of the QinetiQ flotation the market was strong with many other deals competing for funds.
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33 The underwriting agreement sets out the basis on which the Global Coordinators guarantee to buy the shares in QinetiQ at a predetermined price in order to sell them on to the market.