Is the tech fad truly fizzling on Wall Street?
You might want to talk to Ken Moelis, head of corporate finance for Donaldson, Lufkin & Jenrette Securities Corp., before voicing an opinion about that at the next cocktail party.
DLJ, long known as a powerhouse institutional brokerage and investment banking house, and for its prowess in junk bonds in the 1990s, has hardwired itself into the “tech-telecom” space in the past two years.
Let’s talk numbers: The brokerage keeps 120 investment bankers in Fox Plaza in Century City and wants to hire many more. It also plans to add nearly 40 researchers and analysts this summer, when college lets out, according to Moelis.
About three-quarters of local DLJ revenues are now generated from the New Economy. And the pitch is accelerating. DLJ has 200-odd financing projects in the pipeline in tech-telecom, mostly in Southern California and the minimum deal it does is $25 million. Usually, it’s north of $50 million.
“Business is up 25 percent to 40 percent year-to-date from last year,” Moelis said.
Most tech deals are private equity, meaning shares are sold to private investors, off the exchanges. In the old days 1998 a private deal was huge if it nudged $50 million. Last week, DLJ put the finishing touches on a $150 million private placement for Los Angeles-based TelePacific Communications Inc., a telephone and Internet services company.
Other deals abound, such as a pending $615 million IPO for Santa Monica-based Entravision Communications Corp., a Spanish-language media company. Three other IPOs were underwritten in late April.
Investment banking in general has changed in the past five years, perhaps more at DLJ than anywhere else. DLJ bankers used to wear suits and talk about underwriting junk bonds, takeovers, recapitalizations, and merging companies. High-yield underwriting accounted for the lion’s share of revenues, although there was some equity action.
Now, DLJ bankers are 24/7 casual. If you get a bunch of DLJ tech bankers into a room, and forget the nameplate on the door, you hear venture capitalists talking except sometimes a DLJ banker is on the scene of a potential deal even before the VC guys. “We often introduce our clients to the venture capitalists,” said Brian Webber, DLJ’s lead tech banker.
And like venture capitalists, DLJ bankers don’t just infuse a company with cash; they bring relationships into the picture “We raised $120 million for Formus Communications Inc.,” said David Posnick, also a DLJ tech banker, discussing the Denver-based client and marketer of radio-based Internet services. “We brought Intel into the deal (as an investor and partner), which has its worldwide marketing staff. That accelerated the growth plan for Formus.”
Said Navid Mahmoodzadegan, a DLJ banker who favors jeans in the office: “You have to be there, involved with the company, before the initial public offering.” Banks who show up late to handle an IPO are called “left out.”
Meanwhile, the whole finance and underwriting game has become compressed, although some of that compression has reversed in recent weeks. While some tech IPOs are being held up due to the Nasdaq sell-off, a number of private-equity deals the type that used to get financed in four months are being done in four weeks.
Moelis said his office is even acting as an “angel investor” for about a dozen companies in Southern California. That raises another point: Thanks to the proliferation of tech-telecom companies in Southern California, “we can actually do most of our work in a 100-mile radius from this office. We are traveling much less than we used to,” Moelis said with a sigh of relief.
It should be noted that DLJ will still do a high-yield bond offering, even for the tech sector, and indeed handled a $1.5 billion junk IOU for United Pan Europe Communications Ltd., which is building out a cable-Internet network in Europe.
Surprisingly, Moelis played down the taking of equity in tech clients as a way to make big hay, even though some brokerages have had enormous paydays on equity taken pre-IPO. “We are a fee-driven business,” Moelis said.
The other big news is that the New Economy appears to have matured so much in the last few years that a big financial house like DLJ can successfully mine the field. It’s not just for VC fighter pilots anymore the big bombers are flying in.
Yet other big shops Salomon Smith Barney, Morgan Stanley Dean Witter have not committed to fielding a major presence in Los Angeles, unlike DLJ.
For Moelis, that translates into a competitive advantage because he and his troops don’t have to catch a plane to get here. “We will never be the reason a deal slows down,” said Moelis. “We are in a client-service business, and we have more people and resources here than anybody else.”
While DLJ bankers concede that some dot-com ideas will get torpedoed, the New Economy is real and becoming more integrated into the whole economy with each passing day.
DLJ is banking on it.
Investment Gumshoe
Most money managers never leave their offices, preferring the “clean” work of reading financials and watching stock prices.
Not so for Andrew Kneeter, portfolio manager with Round Hills Asset Management in Pasadena, which manages a little less than $100 million.
“I like to get out and kick the tires,” said Kneeter, 39, who formerly worked at Ruane Cunniff, a $12 billion shop. “I’ll call up ex-employees, competitors, vendors. Meet with management. Go into stores.”
Generally, the Iowa native first likes to run a computer “screen” of stocks, finding those that are suitably profitable but not overvalued. Then he likes to take a long, close look.
Kneeter (not surprisingly a fan of Warren Buffett) is now high on good quality, small-cap stocks that have been overlooked in near epic proportions on Wall Street. “If you buy a good quality company, sooner or later it will get noticed on Wall Street,” he said.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
