Boutique Banks Find a Niche in Tech

Small investment banks including Allen & Co., Moelis & Co., and Qatalyst Group are joining big houses to advise on high-profile deals

A new breed of boutique investment bank is making its mark on the merger-crazed tech industry. Unlike the niche securities firms that a decade ago focused on research, stock sales, and initial public offerings in addition to mergers and acquisitions, this crop focuses more narrowly on matchmaking but is no less adept at getting in on some of tech's most lucrative deals.

Consider the Yahoo-Microsoft mating dance. In February, Yahoo (YHOO) hired Moelis & Co., the Los Angeles firm started last year by former UBS (UBS) investment banking head Ken Moelis, among other banks, for advice on resisting Microsoft's (MSFT) unfriendly offer, then worth $45 billion. Meanwhile, Google (GOOG) hired Frank Quattrone's new Qatalyst Group for advice on how to respond to Microsoft's bid (BusinessWeek, 3/27/08), according to published reports, supplementing services from Credit Suisse (CS).

Boutiques Offer More Flexibility

More and more, small banks that specialize in mergers and acquisitions and landing investments for privately held clients are joining high-profile houses such as Goldman Sachs (GS), Morgan Stanley (MS), Citigroup (C), and Merrill Lynch (MER) in helping to stitch together deals.

Boutiques that employ at most a few dozen bankers are using a combination of long-standing industry relationships, small teams that assign senior staff to deals, and the flexibility to dart in and out of smaller buyouts to win business. They're gaining prominence as some of the top banks have cut or reassigned tech bankers amid a credit crisis and lull in IPOs.

GCA Savvian Group advised on 45 M&A deals worth $23.6 billion in 2007, pushing it to 59th place based on deal count, from 71st in 2006, according to data compiled by Thomson Reuters (TRI). "Our pitch is all around being a trusted adviser," says Rich Jasen, a Savvian managing director. "This is not something where a managing director shows up for the pitch, and the next time you see him is at the closing dinner."

Filling an Important Niche

Boutiques' influence is being felt around the computer industry. Electronic Data Systems (EDS) hired Evercore Partners (EVR) to help structure its $13.9 billion sale to Hewlett-Packard (HPQ), announced May 13. Evercore has been among the top 25 banks based on M&A transaction value the past four years, after ranking 104th in 2003. Other recent deals include advising IronPort Systems on its $830 million sale to Cisco Systems (CSCO) in January, 2007.

Investors and entrepreneurs say the boutiques fill an important niche in personalized investment banking that's been absent from Silicon Valley since four powerful boutique banks of the '90s—Alex. Brown, Hambrecht & Quist; Robertson Stephens; and Montgomery Securities—either closed or were subsumed by larger firms in the wake of the dot-com crash. The new crop of boutiques is a welcome presence at a time when the IPO drought has made it tough for venture capitalists to get the attention of senior bankers at the so-called bulge-bracket firms—even for a sale. "We can't get our companies out, and one reason is, we can't get the attention of the investment bankers," says Mark Heesen, president of the National Venture Capital Assn.

Unlike those '90s firms, the new boutiques tend to focus on M&A advice and fund-raising, eschewing IPO underwriting, sales of securities, and extensive research. "We're not trying to be everything to everybody," says Brian Roberts, a senior managing director at Evercore. "We would much rather have a dialogue with the CEO about what keeps him up at night."

Union Square Advisors, founded last September by a group of former Quattrone colleagues, has quietly won several M&A and fund-raising projects, and is in talks with large tech companies about future work, say people familiar with the firm's plans. The Yahoo assignment helped catapult Moelis to 12th most active, based on deal value in the first quarter.

Allen & Co. Making Moves in Tech

Perhaps the the fastest-rising specialist (BusinessWeek, 2/26/08) is Allen & Co. Long known for its media expertise, Allen & Co. is making a name for itself as a matchmaker between Silicon Valley Web companies and East Coast sources of capital. The New York company advised CNET Networks (CNET) on its $1.8 billion sale to CBS (CBS) on May 15, and advised social networking Web site Bebo on its $850 million sale to Time Warner (TWX), which closed May 19. In 2007, Allen advised on 10 M&A deals worth $20 billion, vaulting to 61, based on transaction value on Thomson Reuters' list, from 177 in 2006.

Allen, which has ties to media titans including Rupert Murdoch and Barry Diller, has also begun brokering high-profile tech-industry financings, helping widget software company Slide secure $50 million on Jan. 14 from Fidelity Investments and T. Rowe Price (TROW), and helping Marc Andreessen's social networking Web site Ning raise $60 million in April. "As a Silicon Valley guy, I used to know them as an old-world banker," says Mark Stevens, a partner at tech-focused law firm Fenwick & West, who's dealt with Allen through one of his clients. "Now I know them as an old-world banker who's brought a lot of their contacts over to the new media world."

M&A Volume Could Pick Up Again

To be sure, the major investment banks are still the most powerful deal brokers on Wall Street when it comes to acquisitions and investments. Citi and Goldman advised on 500 or more M&A deals each in 2007, and UBS, JPMorgan Chase (JPM), and Morgan Stanley each worked on more than 400. By contrast, the largest boutique banks only tackled a few dozen deals last year.

A slowdown in M&A activity has also put dents in some prominent boutiques. Companies worldwide completed 1,942 M&A deals between Jan. 1 and May 21, 11% fewer than during the same period of 2007, according to Thomson Reuters. Deal value during the period fell to $70.9 billion, vs. $92.5 billion a year ago. Partly as a result, Evercore lost nearly $1 million in the first quarter as advisory fees fell 52% amid a slump in buyouts. Specialty bank Greenhill & Co.'s (GHL) $19.2 million first-quarter profit fell short of analysts' estimates amid a delay in deals. And ThinkEquity Partners was acquired by London investment bank Panmure Gordon in a $62 million deal last year, in what was seen as a rescue of the money-losing San Francisco boutique.

Still, the value of all M&A transactions shot up 29% last year, and investors and M&A lawyers say volume could pick up again, particularly in the Internet sector, as the slower U.S. economy forces Web 2.0 startups to sell and angel investors look to liquidate their portfolios.

Boutique banks have been able to thrive by competing for the largest deals, while having the flexibility to reach down and scoop up business on smaller deals in the range of $100 million that are sometimes bypassed by larger firms. But the little guys are able to charge rates comparable to those of their larger competitors. "Their premise is not that the fees are lower, it's that the service is better," says a law firm partner who's advised tech companies on dozens of M&A deals. "This used to be the guy who ran tech M&A at Goldman Sachs, Credit Suisse, or Morgan Stanley, and now they're focused on you."

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