Ip Os: Silicon Valley Seeds Itself
Steven P. Jobs has always been a pioneer. The co-founder of Apple Computer Inc. was no different last summer when he went shopping for bankers to manage the hot initial public offering of his latest venture, Pixar Animation Studios. Jobs wanted to hire San Francisco-based Robertson, Stephens & Co., a small investment bank specializing in high-tech clients, instead of going with the more prestigious New York firms. But, he wondered, would investors go for such an unusual choice? To find out, Jobs queried institutional investors, asking them whether they would be any less interested in the deal if Robertson handled it instead of a firm such as Goldman Sachs & Co.
The answer: "All of them said the West Coast guys would be as good. And half preferred it, because they treat them better," says Jobs. Robertson Stephens got the plum deal, and Jobs enjoyed a spectacular debut on Nov. 29 when the stock that day soared from 22 to 39. "I think it's a fairly significant milestone of the coming of age of the West Coast banks," says Jobs.
Those words are music to the ears of such specialty firms as Robertson Stephens, Hambrecht & Quist, Alex. Brown, Cowen, and Montgomery Securities. For these erstwhile also-rans, it proves that Wall Street no longer has a lock on the red-hot market for technology IPOs. That has intensified the already fierce rivalry among investment bankers. "The New York firms have always come in and just skimmed off the cream, taking only the very best offerings," says Sanford R. Robertson, chairman of Robertson Stephens. "That is breaking down very fast."
Driving the boutiques' success is the boom in high-tech business. The number of IPOs in industries ranging from biotech to electronics has increased from 47 deals that raised $914 million in 1990 to 219 deals that garnered $8.4 billion in 1995, according to Securities Data Corp. The market share of high-tech deals lead-managed by these mainly San Francisco-based investment banks has doubled. Their share went from a low of 18% in 1992 to more than 37% last year, says Securities Data. Mainstream firms, primarily New York-based, were lead underwriters for about 49% of high-tech IPOs in 1995, compared with a high of 70% in 1992.
More deals mean fatter fees: some $577 million for all high-tech IPOs in 1995. And the specialty banks are cashing in. Robertson Stephens earned more than any other firm, with $84 million. Morgan Stanley was next, taking fees of $68 million. Says Perrin Long, a securities industry analyst: "On a national basis, these [boutique] banks are becoming more important."
What's the secret to the niche firms' current success? They say it's their proximity to Silicon Valley and other tech industry headquarters. It also helps that they are as nerdy and obsessed by technology as their clients. Companies want to know that their bankers' research is steeped in a thorough understanding of the companies and the technology. "Technology flows through the veins of the people who work here," says Cristina M. Morgan, Hambrecht & Quist's co-head of investment banking.
REVENGE? That hasn't stopped the big banks, which increasingly are chasing even small tech deals. When Arbor Software Corp. went public in November, most observers didn't expect the modest $29 million IPO to attract Wall Street attention. Morgan Stanley, which says it does plenty of small IPOs for industry leaders, fought hard to win the deal, even agreeing to negotiate its fees. "I was surprised Morgan was even interested, given the size of the deal," recalls Arbor's chief financial officer, Stephen Imbler. "But they showed us they were really hungry."
Hunger can turn to competitive sniping. Competitors say that Morgan Stanley downgraded a potential client after it lost that company's underwriting business to a rival. Morgan Stanley was offered the second slot behind Robertson Stephens on a deal for Gilead Sciences Inc., a biotech company in Foster City, Calif., that issued stock this February. After failing to win the offering, Morgan Stanley analyst Eric M. Hecht reduced Gilead's stock from "outperform" to "neutral." Robertson Stephens CEO Michael G. McCaffery says: "It appeared to the parties involved that these events were linked."
Hecht says that's "a ridiculous accusation." He began recommending Gilead in late 1992 when the stock was 12 and downgraded it in late January because it soared to a heady 41, gaining 16 points in two months. If there's bad blood, it's apparently news to Gilead's chief executive, who recently spoke at a Morgan Stanley conference. "There is no relation between the underwriting and my recommendation," says Hecht.
Despite the Gilead loss, the New York firms aren't about to be blown away. IPO market leaders Morgan Stanley and Goldman Sachs still control most of the high-profile technology business. Frank P. Quattrone, who heads Morgan Stanley's global technology group in Menlo Park, Calif., says a major weakness of the niche banks is their limited scope. Former boutique banking clients such as Chiron Inc. and Sun Microsystems Inc. left specialty banks when more sophisticated financial services became necessary. "We do not view them as competitors," says Quattrone. "They don't have the global reach of Morgan Stanley, and they don't have the high-end capabilities for complex transactions. We are the lead manager and they are the co-manager [on IPOs], and it has never been any other way."
NO DICE. Such an arrogant attitude could be a turnoff to potential clients. But the big banks have turned bravado into a selling point--even refusing business if they don't get top billing. When Cybercash Inc., an Internet financial services company, went public in February, Morgan Stanley was offered the No.2 position behind Hambrecht & Quist. But the firm walked away from what became a wildly successful deal rather than play second fiddle. Says Cybercash CEO William N. Melton: "I understood their position and went on without them." Jobs said it was the same thing with Pixar. "They [Morgan and Goldman] either wanted to be No.1, or they didn't want to play."
Quattrone says Morgan withdrew from the Pixar competition because the deal didn't "fit our risk profile." He contends the firm doesn't want to be involved in deals if it can't make sure that the offering will go well. "As a co-manager, you don't have control over pricing, timing, or how to position a company," he says. "We don't want to devalue the [Morgan Stanley] brand."
There's no question that many executives at startups revere such sterling names as Morgan or Goldman, which attract investors. They "carry a certain level of prestige not enjoyed by the other banks," says venture capitalist Peter J. Barris, who is on the board of UUNET Technologies Inc., an Internet company Goldman took public. Adds Peter L.S. Currie, Netscape Communications Corp.'s chief financial officer, who relied on Morgan Stanley to do a sizzling 1995 IPO: "They bring throw-weight to the investment process."
To counter that weight, the high-tech boutiques have beefed up their staffs to handle sophisticated transactions. The niche firms are also spreading out, going after international technology markets. Robertson Stephens plans to open its doors in London this April. Montgomery Securities will expand to New York and Boston. And Hambrecht & Quist announced in January a joint venture in Europe. Crows Daniel H. Case III, H&Q's CEO: "Specialization is winning worldwide. We're unstoppable if we execute right." At least as long as the tech market stays hot.