Down but not out in Menlo Park
Koenig: "The market
will come back"
by Heidi Nasr
Posted 04:25 PM EST, Jul-6-2001
The Deal, LLC
<<As the head of technology banking for Goldman, Sachs & Co., Bradford C. Koenig has been instrumental in maintaining the firm's stranglehold on the top of the investment banking league tables for much of the tech boom.
Goldman has long been known for its relationship-banking approach, cultivating the long-term clients that were its bread and butter. During the height of the tech boom, however, Goldman used that blue-chip reputation to bring in young companies and take them public at light speed. The firm took 49 technology-related companies public between 1997 and the first quarter of 2001, raising nearly $6 billion in capital. Even in 2000, as hints emerged of a tech wreck, Goldman raised $36.5 billion in technology equity offerings, including IPOs and follow-ons. About $21.5 billion of that was in the United States.
The revolution was not without perils. Several of the companies Goldman took public are now the subject of IPO allocation lawsuits. And the firm has been hit hard by the slowdown in the tech market, underwriting few IPOs. Of the few that the bank has underwritten, there have been disappointments like Marc Andreessen'sLoudcloud Inc.
A managing director who has been with Goldman since 1984 and with its tech practice since 1987, Koenig works out of the firm's Menlo Park, Calif. office. He recently spoke to The Daily Deal about the technology sector and the fate of Goldman in this sobering environment.
The Daily Deal: What is the current state of the tech sector?
Brad Koenig: The tech sector right now is in a mode of recovering from the bubble of 1999 and 2000 and the excesses of that time period.
The bubble manifested itself not only in the equity markets ... which doesn't really tell the story of how deep the damage has been. Nasdaq stocks have been down 80%. The bubble was driven by the bubble in gross domestic product (GDP) growth, which accelerated from 2% to 6%, and spending in information technology grew ... to 30%. We're in a phase where we're correcting the excesses of the tech bubble.
Will we see any deals coming from the technology sector, either in terms of mergers and acquisitions or IPOs?
Stepping back and looking in context, in terms of technology and Internet IPOs, there were about 150 on average from 1995 to 1998. In 1999 there were over 400 and in 2000 — even with the Nasdaq declining very significantly — there were over 300 in 2000.
There were also 200 technology IPOs withdrawn out of registration, many of which will never return to the capital markets.
This year, there have been 10, [many of which have not been] the more classic entrepreneurial venture-backed IPOs. For IPOs the rate has dipped significantly below the trend line.
The environment going forward in the latter half of this year will continue to be difficult for technology IPOs, certainly for earlier stage, venture-backed technology IPOs.
Why won't those withdrawn issues return?
Because many of those had business models and growth strategies and financing needs that are not viable in the context of today's more sober capital markets environment.
Are there any subsectors that seem to be completely dead?
I don't really think so. What was once called the Internet sector was dot-coms and B-to-B [business to business] exchanges and incubators. The market for the IPOs of those kinds of companies has been dead for a year now — that's old news.
In terms of the technology markets, different sectors are undergoing different levels of business activity and have different outlooks. It's hard to paint with a very broad brush.
In each sector, whether it's semiconductors or software, there are very big companies that have the opportunities to be big markets. There will still be opportunities of strong companies to go public across a variety of sectors in the next 12 to 18 months.
What will those companies need?
... [A]nnualized run rates of revenues in the $30 million-plus range, profitability that is visible and imminent, multiple customers with strong customer references and technology endorsements, strong management team and good track records.
What subsectors are going to come back first or most strongly?
A number of different sectors — communications, technology (which encompasses optical networking), semiconductors, wireless networking, software, enterprise software.
The reason that I'm optimistic about the technology IPOs going forward is that Moore's law and Metcalfe's law have not been repealed. They will continue to drive new applications ... new services, new products and new companies and the rate of technology innovations have not changed.
What has changed is the equity markets. It's hard to say whether that will come first. We will see very exciting companies with very innovative technologies and products and services in all of these sectors.
[Moore's law refers to the accelerated pace of the technological revolution. Metcalfe's law is that communications bandwidth doubles every nine months.]
Do you need to approach clients differently now?
Clearly, the M&A level of activity has declined as well. That's due to a number of factors, including increased volatility in the markets, and [the fact that] many of the companies that have been the most active acquirers over the past several years are now focused on restructuring and rightsizing their own businesses. That has led to a lower level of financing and M&A activity.
We are quite busy. Even though the IPO market is off by a number of deals, the overall financing market has seen windows of opportunity and we've done follow-on or convertible financings. So our dialogue with those clients continues to be very active.
On the strategic side ... the environment hasn't changed since 1999. But the velocity of the deal flow between 1999 and 2000 accelerated so quickly and significantly that we were not able to spend as much time with our clients as we would like to.
Now given the pause in the market, we are spending a lot of time communicating as actively and aggressively as we can with our clients.
For the first nine months of 1999, Goldman amassed a big tech presence, underwriting 32 IPOs, 23 of which were tech-focused. How will the reduced flow of tech deals affect the firm?
One of the great strengths of the firm is our position in many sectors, whether it's financial institutions, communications and media. There are many different industry sectors, and also a very high level of integration that we have among the tech practice and other contiguous areas.
In the height of activity in the tech sector, a very large proportion of our teams were staffed with folks from mergers and acquisitions and corporate finance.
Now if you looked at Wall Street as a whole, there was an increase in the overall financing volume that was technology driven, no doubt. Technology companies represent about 20% to 25% of the market value of the S&P 500.
That's a pretty good proxy of how to calculate our level of relative activity — the overall technology investment banking market relative to overall investment banking market.
Looking back, if you knew then what you know now, is there anything you would have changed or done differently?
There are clearly some IPOs, some companies we took public that turned out not as we had hoped. That's been the case across the board [with most investment banks].
We tried not to let the frothiness of the market interfere with our approach. We were always very selective, working with the world's most important companies.
Now that the volume of tech deals has fallen, what is your plan?
The way we have approached building our team going forward, our strategy ... all of that is based on the notion that the market will come back. The way we are organized and marketed and staffed is to be the market leader when the markets turn around.
Sources say that Goldman chose to spare the tech group in its recent layoffs because it sees tech coming back. Is that true?
I don't have the facts on that, so I can't comment. We're committed to working towards having the right kinds of staffing levels consistent with very attractive opportunities in the coming years.
How many bankers do you have in the tech group now?
About 125 to 150 around the world. In Menlo Park we have 50 to 60.
Are you planning any new hires?
We are bringing on MBAs and graduating business students as well as college graduates in September.
How many?
In the low double digits.
What kinds of signs are you looking for in a tech resurgence?
Evidence that the businesses for tech companies have stopped deteriorating — that we've hit the bottom. I don't think we've hit that point yet, but we are getting close.>> |
