Tag: investment banking

Goodbye Montgomery, hello ArchPoint

Brenon Daly

Contact: Brenon Daly

Following the historic upheaval at investment banks last fall, the changes have begun to filter down to the smaller firms, as well. For instance, Morgan Keegan & Co picked up tech boutique advisory shop Revolution Partners last December while hedge fund Ramius LLC has reached for Cowen Group in a deal that’s expected to close by the end of the year. And now we understand another change is set to play out in the tech banking business in the coming weeks.

A core quartet of bankers will be leaving Montgomery & Co to establish an independent tech M&A advisory firm, ArchPoint Partners. A source tells us that Rob Louv, Dan Williams and John Cooper will be ArchPoint’s managing partners, with Susan Blanco joining as a senior director. Initial plans call for San Francisco-based ArchPoint to possibly double its number of employees by the end of 2009, and perhaps double that figure again next year.

We are told the split from Montgomery will be pretty clean, with ArchPoint carrying over 10-20 existing clients. It has already brought in five or so clients on its own name, although the boutique won’t formally launch until next month. (ArchPoint already has its own license, and has no outside investors. Founders Cooper and Louv are backing the firm.) The split from Montgomery comes as the group has a bit of momentum behind it. Montgomery banked MX Logic in its sale to McAfee, the largest security transaction since last October and one that came with a refreshingly healthy multiple of 4 times MX Logic’s estimated sales.

EMC and advisors: All or nothing

Brenon Daly

Contact: Brenon Daly

After EMC doled out no fewer than nine credits to different banks for working on its acquisition of Data Domain, we were curious how the deal credits would flow around the largest-ever purchase by EMC subsidiary VMware. (The unusually long list of advisers for EMC on Data Domain made us think – of all things – about the quip about compensation under some communist regimes: People pretended to work and the government pretended to pay them.) As it turns out, EMC/VMware swung to the other extreme, with not a single bank working for the virtualization giant in its purchase of SpringSource.

That’s not unusual, since VMware hadn’t really used bankers in the dozen or so acquisitions that it had inked before SpringSource. But those deals were mostly small. In fact, the cumulative spending for all of its earlier buys totals only about half of the $420m in cash and stock that VMware is set to hand over for SpringSource. By our tally, VMware’s pending purchase is the third-largest pickup of a VC-backed tech firm so far this year. Not that the print will show up for any bank. SpringSource didn’t use an adviser, either.

Advisors in EMC-Data Domain: a chorus and a solo

Brenon Daly

Contact: Brenon Daly

It’s often said that there are three types of falsehoods: lies, damn lies and statistics. To that list, we might be tempted to add a fourth category: league tables. That’s in the front of our minds because we just put together our mid-2009 update to the rankings of the busiest tech banks. (For those curious, Credit Suisse Securities took the top honor, with more deals and more dollars advised than any other bank. Banc of America Securities and JP Morgan Securities rounded out the podium.)

To be clear, we’re not saying that banks make up deal credits. Instead, we’re just noting that the credits, like statistics, may be more malleable than most people think. As we tally the transactions to come up with our rankings, there are invariably deals that smack of a little gamesmanship. In this case, it’s the chorus of advisers for EMC in the storage giant’s purchase of Data Domain. No fewer than eight banks – ranging from bulge brackets to a high-end boutique to even a midmarket firm – are all claiming credit for EMC. (We confirmed, indirectly, with EMC that each of the banks did indeed play a role in the acquisition.)

Meanwhile, on the other side, boutique advisory firm Qatalyst Group took sole credit for working the sell-side for Data Domain. Some observers initially dinged Frank Quattrone’s shop for running such a narrow process. (We understand, for instance, that EMC didn’t see the initial book on Data Domain when NetApp was preparing its bid.) Whether that’s the case or not is largely academic at this point, since the transaction closed a week ago. And it’s largely irrelevant, given where the deal was ultimately done. Data Domain enjoyed the richest price-to-revenue multiple in the sale of a US public company since March 2008.

UPDATE: After initially publishing this piece, Bank of America Merrill Lynch reached out to us to say that they, too, should have a deal credit for advising EMC. For those of you keeping score at home, that brings the total number of advisors for EMC, which was working to land Data Domain for all of two months, to nine separate banks.

Bulging boutiques

Brenon Daly

Contact: Brenon Daly

In our league tables report, we noted that some 143 firms advised on at least one technology transaction in 2008. That was down slightly from the 153 firms we tallied in 2007, even as the number of tech transactions dipped about 17% year over year. Obviously, some of that decline can be chalked up to the investment banks that dramatically and abruptly disappeared in the last year. But more so, the thinning ranks of investment banks can be attributed to the fact that deal flow is drying up.

So far this year, the number of deals announced has fallen about one-quarter to just 574. (And don’t even ask about M&A spending, which has plummeted to just $7bn from $49bn during the same period last year.) That, combined with the fact that fees are increasingly coming under pressure, has meant much leaner times for the advisory business in general. So far, the impact of that has primarily been felt by the bulge-bracket banks, which have made sharp cuts in their ranks since September.

This has sparked a flow of talent from big shops to small. Earlier this week, for instance, a pair of former Bear Stearns bankers founded their own tech advisory firm, Stone Key Partners. We expect many more of the dislocated bulge-bracket bankers to follow suit and hang out shingles of their own. In the meantime, many bankers have joined boutiques of various sizes. Since Wall Street imploded in mid-September, boutique firms including Revolution Partners, America’s Growth Capital, Perella Weinberg Partners, Evercore Partners and Redwood Capital have all picked up former bulge-bracket bankers.

And there are additional moves we’ve heard about but have yet to be announced. We understand that Goldman Sachs’ software banker, Ian Macleod, is set to join Qatalyst Partners, the San Francisco-based firm launched by Frank Quattrone a year ago. We also heard recently that Richard Vieira, who worked a number of open source transactions at Jefferies & Co before leaving some two years ago, has resurfaced. Vieira is joining Shea & Company, a three-man shop founded in 2005 by JP Morgan Securities’ former head of software banking, Michael Shea.

Thain’s thin fees

Brenon Daly

Contact: Brenon Daly

In the combination of Merrill Lynch and Bank of America, it’s all over but the shouting. The banks held separate shareholder meetings Friday to take the pending deal to their respective shareholder bases, with both sides approving it. (Originally valued at some $50bn, the slump in shares of Bank of America has cut the final price of the all-equity transaction to less than half that amount.) The deal will officially close before year-end.

While all that seems straightforward enough, the shouting is coming from a showdown over (what else?) money. Specifically, the insistence by Merrill Lynch CEO John Thain that he’s due a $10m bonus for his work over the past year. We’ll leave the debate on ‘Wall Street greed’ to Lou Dobbs and others, and, similarly, will pass on offering thoughts on whether the bonus would make Thain overpaid or not. However, we would note that a $10m advisory fee for a $21bn deal is hardly exorbitant, as any banker would tell you.

Select 2008 deals for Merrill Lynch and Bank of America

Date Acquirer Target Deal value
October 2008 ebay (Merrill Lynch) Bill Me Later $945m
October 2008 Hewlett-Packard LeftHand Networks (Merrill Lynch) $360m
July 2008 Brocade Communications Systems (Bank of America) Foundry Networks (Merrill Lynch) $2.6bn
April 2008 Blue Coat Systems (Merrill Lynch) Packeteer $268m
March 2008 BMC Software (Merrill Lynch) BladeLogic $800m
January 2008 Microsoft FAST Search & Transfer (Merrill Lynch) $1.2bn

Source: The 451 M&A KnowledgeBase

Instant investment banks

Brenon Daly

We wrote earlier this week that Bank of America’s pending purchase of Merrill Lynch gives the Charlotte, North Carolina-based giant its first real opportunity to pick up M&A advisory work in the tech market. Well, that assessment goes double for Barclays, which plucked Lehman Brothers’ banking unit out of the rubble, and it goes triple for whichever bank – if any – snags perennial tech powerhouse Morgan Stanley. (Reports on Thursday indicated that Morgan Stanley was holding talks with Wachovia, as well as considering a sale to a European institution.)

Of course, the tech M&A business is just a side-note in the unprecedented consolidation of investment banks that’s played out this week. But it’s one that shouldn’t be overlooked. Deal flow in the tech sector has approached a half-trillion dollars in each of the past two years. Even during an off-year like 2008, we’ve already seen some $250bn worth of transactions, more than the full-year total in 2004. That’s a lot of banking fees.

To be sure, there will be a substantial amount of disruption in the tech banking business as the new owners integrate the formerly independent investment banks. (For instance, LogMeIn, which filed to go public in January, still has Lehman listed as its lead underwriter. Lehman’s new owner, Barclays, is hardly known for its equity underwriter business, much less underwriting tech offerings.) But at the very least, the acquiring banks picked up the opportunity to be relevant in a market where deals worth hundreds of billions of dollars are going to get done each year. And, thanks to these historic times, they got the chance on the cheap.

UBS: You buy us?

Brenon Daly

As it reported an ‘unsatisfactory’ loss of hundreds of millions of dollars, UBS AG also said Tuesday that it will carve off its investment banking business. The move represents a retreat from the ‘universal bank’ model the Swiss giant has pursued. And despite management’s statements, it makes a sale of the banking unit more likely. (Just as Time Warner splitting AOL’s legacy Internet access division from its online advertising business clears the way for a sale of the dial-up unit. That is, if there are any AOL subscribers left to sell.)

Washed away by the gallons of red ink spilling from the investment banking department is that UBS actually has a fairly robust advisory business, particularly for transatlantic tech deals. In terms of deal value, it ranked fifth in our recent league tables covering transactions between North America and the EU from mid-2007 to mid-2008. The previous year, UBS placed fourth. (An executive summary of the report is available here; download the full report here.)

Far and away, UBS was the busiest bank, advising on 13 transatlantic transactions over the past year. Both Lehman Brothers and Deutsche Bank advised on eight transactions. And UBS has kept its momentum, already claiming another tombstone since we closed our survey period on June 30. (UBS served as sole adviser for IBM in its purchase of Paris-based ILOG for $340m.) But given how things stand now, the next big deal UBS advises on could be the sale of its own banking business.

Selected UBS-advised transatlantic deals

Date Acquirer Target Price
July 2008 IBM (sole UBS mandate) ILOG $340m
April 2008 Apax Partners TriZetto Group (sole UBS mandate) $1.4bn
Feb. 2008 Reed Elsevier (co-adviser UBS) ChoicePoint $4bn
April 2008 Diodes (sole UBS mandate) Zetex Semiconductors $176m

Source: The 451 M&A KnowledgeBase

Learning Tree seeds sale

Brenon Daly

After more than 30 years in business, Learning Tree International has slapped a ‘for sale’ sign on itself. The IT training shop has retained RBC Capital Markets to guide the process, which comes as the company has only partly worked through a turnaround. It suffered through several years of stagnant revenue and negative operating margins, when the Internet bubble burst and companies cut back sharply on their IT staff members, which, at the time, were Learning Tree’s only customers. (The company has since expanded into management training as well.)

The timing of the possible sale is curious. Learning Tree has come up short of Wall Street estimates for two straight quarters, leaving the company’s stock below where it started the year. (Even with the bounce on May 28 from investors betting on an acquisition, Learning Tree shares have dropped nearly one-quarter of their value in 2008.) Learning Tree currently sports a market capitalization of about $290m, but holds $57m in cash and no debt, lowering its enterprise value to $233m. The company will likely record about $190m in sales in the current fiscal year.

Given the current valuation, maybe some of the executives should take a Learning Tree course on maximizing shareholder value. Of course, the top two executives have a distinct interest in maximizing shareholder value, given that they own nearly half of the company’s 16.6 million shares. Learning Tree cofounders David Collins and Eric Garen own 25.6% and 20.4% of the company, respectively. And if that weren’t motivation enough, we couldn’t help but notice a kicker that could put even more money into the executives’ pockets: The company approved a bonus of one year’s worth of salary for executive officers if Learning Tree gets sold before the end of next March. So, the sellers are ready, but where are the buyers?

Evercore’s short cycle

Brenon Daly

Investment banking, as everyone knows, is a cyclical business. In the case of Evercore Partners, the downswing lasted about a day. On Monday morning, CEO Roger Altman was on a call with disenchanted investors trying to explain why the company booked just half the amount of revenue in the first three months of this year that it did in the same period last year. (Setting aside the utter ridiculousness of projecting quarterly revenue on an advisory business, Evercore’s first-quarter revenue of $45m came in about one-third below the amount Wall Street had projected.) On the report, Evercore shares sank to their lowest level since the boutique bank came public almost two years ago.

By Monday afternoon, however, it was looking like Evercore was set to pocket tens of millions of dollars for the bank’s role in co-advising EDS on its $13.9bn sale to Hewlett-Packard. Depending on how Evercore and Citigroup divvy up the advisory fee, Evercore could end up taking home more money from its EDS mandate than it booked in the first three months of the year. (HP’s purchase is expected to close in the second half of 2008, so the success fees will flow after that.) We guess that’s what Altman, who worked firsthand on the EDS sale, meant when he said the bank’s backlog was ‘fine.’ Evercore shares, however, haven’t recovered and, in fact, are changing hands below where they were on Monday.  

Banking HP-EDS

Company Advisers
HP JPMorgan, Lehman Brothers
EDS Citigroup, Evercore Partners

Wounded Bear

Brenon Daly

Given all the hardships (self-inflicted and otherwise) that have hit Bear Stearns over the past two months, we thought we found some good news for the investment bank earlier this week. Leafing through the paperwork around Borland’s sale of its CodeGear division to Embarcadero Technologies on Wednesday, we saw Bear listed as one of the advisers to CodeGear, along with boutique firm GTK Partners. (Embarcadero, owned by the sharp-penciled buyout guys at Thoma Cressey Bravo, didn’t use a banker.)

So does this mean Bear, whose rescue sale to JPMorgan is set to be voted on at the end of this month, stands to get a payday from the CodeGear engagement? Unfortunately not. Like so much happening at the bank these days, they’re in line for scraps. (For the record: Bear Stearns ranked 17th in our league tables last year, advising on nine deals collectively valued at $8bn.)

Bear Stearns had a long connection with Borland, particularly during the days of former CEO Dale Fuller, who was replaced in 2005 by current chief executive Tod Nielsen. (Bear banked Borland’s $185m acquisition of TogetherSoft and its $24m acquisition of Starbase, both in October 2002.) So it was natural for Borland to tap Bear when it decided two years ago to shed its CodeGear division as part of a step out of the developer tools business. To put it charitably, the Bear-led divestiture was fitful. A source familiar with the divestiture says the division was pulled out from under several possible acquirers, leaving the market a bit soured on the asset as the process dragged on for months.

Whatever the case, Borland pulled Bear off the deal last October and engaged boutique bank GTK Partners. (Why GTK? Managing director Ali Tabibian had previously worked with CodeGear CFO Cynthia Mignogna on the 1999 sale of Infoseek to Walt Disney. Mignogna also served as CFO there.) So GTK will be pocketing the majority of the advisory fee, with Bear getting a very small portion of that as part of a ‘tail.’ It’s just another sad event as the swan sings for Bear.