~OT~....Mohan: The I-Banks are Making Big Bucks off of Financing in the Tech Sector...It's Sure Not Surprising <VBG>....FYI...
<<Banking on technology
High-tech financing is the largest and fastest-growing sector in investment banking
By Edward Iwata
Of The San Francisco Examiner Staff
8/22/99
examiner.com
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Seemingly eons ago, technology financing was a small market ruled by investment bankers in San Francisco and led by industry visionaries such as Bill Hambrecht, Sandy Robertson and Thom Weisel.
The Wall Street elite scoffed at high-tech bankers. They chided Robertson, calling him "Buck Rogers," after the comic strip space adventurer.
The few Wall Street bankers who ventured west stayed briefly, dining with clients at the Mandarin Oriental or the Bankers Club before jetting back to New York.
Not anymore. The anti-technology bias on Wall Street has vanished faster than you can say www-dot-com. Today, high-tech financing is the largest and fastest growing sector in investment banking, with brawny Wall Street firms dominating mergers and acquisitions as well as initial public offerings.
"Investment banks have awakened to the opportunities in technology financing," said Paul Chamberlain, managing director at Morgan Stanley Dean Witter and co-head of the firm's West Coast technology group.
"We're bringing a lot of wealth and experience to bear on the sector," he said.
As technology enjoys its golden age, several New York investment banks have strutted into Silicon Valley to get in on the lucrative business.
Earlier this year, Goldman Sachs opened a large office in Menlo Park on Sand Hill Road, "ground zero" for venture capital.
During the mid-1990s, Morgan Stanley, Merrill Lynch, Donaldson, Lufkin & Jenrette and other firms also strengthened their Northern California outposts, adding hundreds of bankers and analysts to their Silicon Valley and San Francisco offices.
"Five or 10 years ago, the major New York banks saw the tech sector as a niche market," said Brad Koenig, co-head of Goldman Sach's global technology group. Koenig has been called the most powerful investment banker in Silicon Valley by Industry Standard magazine. "Today, Wall Street firms are making technology their highest priority."
Their sheer size and range of investment services have eclipsed two of San Francisco's mightiest technology underwriters: Montgomery Securities, founded by Thom Weisel; and Robertson Stephens, started by Sandy Robertson. A third San Francisco-based investment firm, Hambrecht & Quist, still funds high-tech startups although co-founder Bill Hambrecht has left to launch an online investment firm.
The financial firepower of the larger Wall Street firms has transformed the nation into a high-tech economy. Last year, the dealmakers churned out a record $419 billion in technology and telecommunications mergers, according to Forbes magazine. That amount far surpassed other business sectors.
The frenzied pace didn't slow in the first half of 1999, with online deals ruling the financial headlines. Whether in Wall Street corporate offices or over breakfast at Buck's in Woodside, bankers and their clients signed off on a record 617 Internet-related mergers worth $43 billion, according to Thomson Financial Securities Data. That figure does not include any telecommunications deals.
According to Koenig, the high-tech arena has 1,200 publicly traded companies with a combined market value of a half trillion dollars. Any Wall Street firm would be foolish to ignore that business.
"The growth is staggering," Koenig said. "If you want to be a leading global investment bank, you've got to be a leader in the tech market."
Nowadays, the technology market brings in 5 percent to 25 percent of a Wall Street bank's revenues, according to Chamberlain.
Not surprisingly, competition is fierce among the top investment banks. Each boasts of having the best and brightest bankers in the high-tech galaxy. Each touts the hot Internet firms and high-tech companies they've advised on mergers or taken public.
"Our name carries its own weight and cachet," said Scott Ryles, a 20-year Wall Street veteran and the head of Merrill Lynch's technology group in Palo Alto. "We have market scale, market savvy and market power — all the services a client may need."
Courting the companies
Millions of dollars are spent courting clients who may run the next Netscape or Amazon.com. Last month, for instance, Merrill Lynch flew in hundreds of clients to the Beaver Creek Hyatt resort near Vail, Colo., for several days of dining, golfing and fishing. Other banks sponsor similar gatherings.
In February, when Goldman Sachs moved to the same Menlo Park office complex as its rival, Morgan Stanley Dean Witter, the Morgan Stanley bankers sent over a big fruit basket as a gift. A welcome note read: "There goes the neighborhood!"
The clubby rivalries even spill over into the bankers' personal lives, one executive joked. Two of the Valley's top high-tech financiers — Goldman Sach's Koenig and Merrill Lynch's Ryles — live across the street from each other in Atherton.
The new style of Silicon Valley banking is worlds apart from Wall Street's traditions. Bankers here don casual attire that mirrors the laid-back entrepreneurs of the Valley. Hot summer days in August are spent working on mergers and public offerings, not vacationing in the Hamptons on Long Island or on Cape Cod.
The pace of dealmaking and strategizing has quickened. While old-style merger talks might drag on for months, high-tech deals get sealed within weeks, even days. Internet and other technology products grow, wilt and bloom again so rapidly that business strategies are constantly being revised.
Standout individuals
The big investment banks also cultivate star high-tech analysts whose stock reports can send a company's shares soaring — or crashing. In today's roller-coaster capital markets, their yea or nay often can make or break a startup deal.
Two of the best-known players are at Morgan Stanley: veteran technology analyst Charles Phillips and Internet analyst Mary Meeker.
High-caliber analysts are in such demand that they command signing bonuses of $500,000 to $1 million and annual cash compensation of $2 million to $5 million. To keep them from jumping to rival firms, brokerages also may offer sweet stock option packages.
"Research analysts are the new elite of the tech sector," said John Wilson, an executive recruiter at Korn/Ferry International in San Francisco. "Their reputations bring in business and give a firm credibility in the marketplace."
High-tech startups hunting for capital crave the prestige and investment clout of Wall Street firms. Which bank fields the most brainpower, the most capital? Who's got the broadest global network? Who boasts the strongest mergers and acquisitions (M&A) team? Who has the closest ties to venture capitalists, large investors, money managers and technology executives?
"In the end, it's still old-fashioned banking," said Chamberlain, a 35-year-old Harvard MBA and Palo Alto native, who has worked on more than 100 high-tech deals over the years.
Some challenges persist
Not all is utopia for the Wall Street firms, though.
The big investment banks have been criticized for charging high underwriting fees of up to 7 percent on IPO deals. The Justice Department Investigation is looking into allegations that several Wall Street firms have colluded on the fees.
In addition, small retail investors and day traders accuse the big brokerages of favoring large institutional clients, who scoop up 80 percent to 90 percent of an IPO's shares.
Critics also say the Wall Street bankers price IPO shares far below market value to ensure that the stock spikes upward on its first day of trading. That practice makes large investors happy, since they buy IPO shares early at the offering price, then sell as the stock hits its peak.
But the practice costs startup companies billions of dollars in potential capital, according to Hoover's IPO Central. If the investment banks priced the IPO shares higher to a stock's true market value, more money would be raised on the first day of trading, some experts say.
Most startups, though, still want to hook up with the Wall Street giants. With their arsenal of services, the Wall Street firms can guide a young company through an initial public offering, talk up its stock or advise the startup on future mergers with competitors.
Coveted relationships
Consider Morgan Stanley's advisory relationship with Ariba Inc., a growing startup in Sunnyvale that makes software and services for electronic commerce.
When Ariba executives planned to go public earlier this year, they interviewed several top investment bankers. All of the firms put on strong presentations, said Keith Krach, Ariba's president and chief executive officer.
But Ariba's executives selected Morgan Stanley. The company was impressed by Morgan Stanley's grueling preparation and passion about e-commerce. The company's star power didn't hurt, either, with analysts Meeker and Phillips turning in impressive pitches during the presentation.
To drum up interest in the IPO, Ariba and Morgan Stanley executives jetted across the United States and Europe for two weeks of "road shows" before 600 institutional investors.
At one point in New York, a weary Krach started garbling his words and making no sense. Meeker jumped in, saying: "Hey, Keith, you're fried. Let's get you a massage back at the hotel."
Ariba went public in June at $23 a share. With so many weak Internet IPOs of late, Wall Street loved Ariba, a strong business with clients ranging from Cisco Systems to FedEx. The stock nearly quadrupled — Ariba raised $115 million in one day.
Krach, driving home late Thursday night after a long flight from New York, said his firm's relationship with Morgan Stanley has really paid off.
"They're a premier bank that clearly wants us to be a market leader too," he said.
Ariba is just one example. There appears to be no end in sight to the investment dollars flooding Silicon Valley. While all sectors endure up-and-down cycles, the lords of Wall Street predict that technology will boom well into the next century.
"We're at the beginning of a 20-year trend," said Ryles of Merrill Lynch, "and we're beyond the pioneering stage.
"We're seeing a sophisticated industry that's deeply transforming our economy. We're here to stay.">> |
