Former Sutro & Co. investment banker John Morris, most recently known for being a Tech Coast Angel, part of a semi-formal angel venture group, has joined the expanding West Los Angeles offices of Gerard Klauer & Mattison Co. Inc., the New York-based securities firm. Morris has signed to bolster "the calling effort" by GKM, especially in Southern California, he says.
"I will be helping to develop our presence in California, to meet with prospective clients, and let them know about our research capabilities, and introduce those clients to our researchers," says Morris.
Morris has been around the block. At 50, he has worked in finance for not only Sutro, but for the old First Interstate Venture Capital group in Newport Beach, for the old Arthur Young CPA shop (now Ernst & Young), for Wedbush Morgan Securities, for PaineWebber, and for boutique merger shop NewCap Partners, near LAX.
"I have worked in this industry from all sides," says Morris. "I think I know when I see an idea that will fly."
Though a boutique firm, GKM is known for being a research shop and for its institutional client base. GKM has 25 analysts on board, heavily oriented to tech companies. In the last year, GKM has been on a hiring binge in Los Angeles, bringing to its offices in Gateway Plaza such names as Jeffrey Logsdon, the entertainment industry analyst, entertainment industry lawyer Ron Silverman, and Davis Merritt, a former KMPG managing partner who led that CPA firm's entertainment practice.
By hiring outside of the usual most investment banking firms only hire investment bankers Morris says GKM will be able to offer a wealth of advice to tech and entertainment firms.
Tenor of the Times
"Maximizing Shareholder Value" is the title of a Feb. 8 conference being hosted by merger shop Barrington Associates, along with law firm Sheppard Mullin Richter & Hampton, accounting firm Singer Lewak Greenbaum & Goldstein and public relations shop Coffin Communications Group. Shareholder value is about more than bragging rights, points out Larry Braun, managing director with Barrington. Lower stock prices can hurt employee retention (due to stock incentives), limit access to capital and thus growth, and make a company vulnerable to a takeover. And, of course, it hurts shareholders.
Southern California, with its large legion of small-cap and tech companies, has been hammered hard by the recent reverses on Wall Street.
"More than 250 Southern California companies have had 52-week stock price declines of 25 percent," says Braun.
One antidote to poor stock performance is to maintain steady corporate communications, advises Bill Coffin, founder of Sherman Oaks-based Coffin Communications, who will speak at the meeting. While larger mutual funds may disdain small caps, there has been an explosion of hedge funds in the last five years, all seeking "venture capitalize" returns, says Coffin, a 20-year veteran of the investor relations trade.
Brokers at Bear Stearns & Co. alone have access to literally hundreds of hedge funds, most of them limited partnerships, says Coffin. Loosely defined, a hedge fund is any pool of capital seeking higher-than-market-rate returns. The hedge crowd generally wants a 100 percent return on an investment in three years. If a small-cap company can make that case, it ought to be regularly telling the hedge funds the news, said Coffin, who has 40 publicly held clients.
Sometimes telling the story to retail investors, via clubs in the National Association of Investment Clubs, is also a good strategy, says Coffin. A good quality Web site, kept fresh with the latest news and transcripts of conferences, is key, he adds.
"Pictures of products can help retail investors visualize the company," he says.
But after all is said and done, with Wall Street's growing mutual funds increasingly passive toward small-cap stocks, maybe being public isn't the answer for some Southland companies. Jon Newby, partner in Sheppard Mullin's corporate and securities department, will give a presentation on "going private" at the conference.
Smart private investors are changing their step to match the new economic beat, say Martin Sarafa and Paul Wolf, managing partner and principal, respectively, at Century Park Capital Partners, a $100 million investing arm of finance shop Houlihan Lokey Howard & Zukin, in Century City.
In general, Century Park invests in stable and growing companies, usually aligning with management, and using leverage borrowed money. Typically, Century Park wants control of a company, but will consider co-investing, but in all cases it wants board seats.
Going forward, Sarafa and Wolf are eyeing companies that slid through the last recession without too much trouble.
"We are staying away from all cyclicals, anything that has a high degree of recession sensitivity," said Sarafa. "We try to buy companies that are very specialized, not selling commodities, or are just one player in a very fragmented industry."
Too, if a company has variable costs that is, costs go down as production decreases that's another plus, say Sarafa and Wolf, who as a rule buy companies with annual sales of between $25 million and $100 million.
For investors numbed by the stupendous price-earnings ratios recently attained on Wall Street, the prices that Century Park pays for properties seem quite pedestrian about five to seven times EBITDA (earnings before interest, taxes, depreciation and amortization).
Indeed, with credit becoming tight, prices for companies have actually retreated. Banks lend to finance the senior portion of a leveraged buyout, while the mezzanine funds financial gnomes who provide junior debt to finance corporate buyouts are winning 30 percent in effective annual interest for their sufferance.
"The result is that buyers have to pay less for assets," said Wolf.
Buyers of small profitable companies today can expect to put 30 percent to 40 percent down, and get expensive financing on the rest, with a blended annual interest cost of perhaps 15 percent, give or take a few percent, say Sarafa and Wolf.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at firstname.lastname@example.org.
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