Wall Street West—A Company’s Value Can Be Found in Alliances It Forms

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Even professional investors often overlook a company’s alliances, and thus miss some good bets, says Peter Pekar, a former Claremont College professor and Booz Allen & Hamilton Inc. consultant, and now national director of corporate alliances for Century City-based financial house Houlihan Lokey Howard & Zukin.

“I don’t see any Wall Street analysts looking at alliances. … Sometimes they are not even mentioned in a company’s annual report,” says Pekar. “But alliances are often the best way for a company to grow.”

Of course, alliances are nothing new; corporations have been getting buddy-buddy for generations, whether formally through joint ventures or in looser partnerships. But growth is king today on Wall Street and often the only way to achieve that geographically, distributionally, operationally, or by a wider mix of products and services is to align with another company, says Pekar.

Part of what drives alliances today is that public companies are tending to concentrate on a core business, quite a contrast from the 1960s and 1970s, when forming huge conglomerates as a growth strategy was the trend. But conglomerates proved difficult to manage, says Pekar.

Paring back to core businesses may be hip today, but investors still want growth. Acquisitions are one strategy, but that eats up capital and the purchases don’t always pan out. And sometimes no other similar business can be acquired.

Today, many businesses are seeking alliances, and geography often plays a role. International alliances are increasingly common, says Pekar. Obviously, if a company stays in a core business, the domestic market is limited. To get the growth that investors want, going overseas often makes sense. But to get a grip on the language and contacts in those places can take years an alliance smoothes the way, says Pekar.

Blue-chip corporate America has of late become alliance happy. Hardly a day goes by that Microsoft Corp. or Hewlett-Packard Co. doesn’t announce an alliance with somebody. The numbers indicate that the trend is real: In 1980, the top 1,000 publicly held corporations had negligible revenues from alliances, according to data collected by Booz Allen & Hamilton. By 1999, nearly one-fifth of revenues were earned from alliances, Pekar contends.

But the real boom in alliances is to come from the middle-market in America, corporations with less than $1 billion in revenues, says Pekar. They are the very companies that need alliances to grow, but have the least internal resources to effect such combinations.

“I hope at Houlihan Lokey Howard & Zukin, we can correct that situation for many in the middle market,” says Pekar. HLHZ will seek not only fees, but also equity stakes in some of the joint ventures created in coming years, he says.

For investors, Pekar suggests looking at alliances that middle-market companies form. Many mid-caps can benefit immensely from an alliance with a well-muscled distributor or marketing firm. Wall Street is often late to pick up on the potential upsides of such alliances, reacting only when fatter profits are reported. “Much of the value of a corporation in the future will be in its alliances,” says Pekar. “Analysts need to start looking at this more regularly.”

Wedbush Plans Growth

Speaking of analysts, homegrown brokerage house Wedbush Morgan Securities has too many at least for its available space, said Ed Wedbush, president.

“We have two and sometimes more people to an office,” he said. “And it’s going to get worse. We have 600 employees now, but we plan to go to 1,000 employees in the next several years.”

With that in mind, Wedbush recently inked a deal to double its space to more than 100,000 square feet in the old Coast Savings building downtown. It will be re-named for the brokerage. Some of the new space will be taken up by investment bankers, Wedbush said.

“Our investment banking efforts should be larger for a firm of our size. We are looking for entrepreneurial bankers who don’t want to be a part of some huge conglomerate,” he said.

Milken Redux

As noted in the local media, financier-philanthropist Michael Milken, the onetime junk-bond king, did not receive a pardon from departing President Clinton, as some had expected. Back in the early 1990s, Milken served two years in federal prison for securities laws violations. What was not noted locally was the churlish letter sent to Clinton late last year by Richard Walker, the Securities and Exchange Commission’s director of the Washington, D.C. enforcement office. The letter may have tipped the decision against Milken.

“Few people have done more to undermine confidence in our markets,” Walker wrote of Milken. He went on to decry Milken’s efforts to “obstruct justice” before he pled guilty in 1991, and again when the SEC investigated alleged broker activities on his part after his release from prison.

“There is compelling evidence he gave false and misleading testimony in that investigation,” Walker wrote of the SEC’s second investigation.

The SEC contended that deals Milken brokered in the mid-1990s, including one joint venture between telecommunications giant MCI and Rupert Murdoch’s News Corp., violated a consent decree he signed with the federal agency in 1991.

In that broadly worded decree, Milken was barred from the securities industry for life.

In 1998, the SEC had Milken disgorge $47 million in fees, which were primarily his reward for work on the MCI-News Corp. transaction. Evidently, the SEC wasn’t mollified by the money, and has been stewing ever since. Walker wrote to Clinton that Milken’s post-conviction conduct demonstrated his continuing contempt for the law and he dismissed any claims to rehabilitation.

Milken could not be reached for comment, but his lawyers were recently quoted as saying he never knowingly violated his consent decree or gave false testimony.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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