Risk-Taking Makes a Come-Back in Technology

Tech: The Return of Risk-Taking
Suddenly, there are mergers and acquisitions, IPOs, and investors galore. Will the reenergized industry lead the U.S. out of the Great Recession?

By Spencer E. Ante

In the past few weeks, Jon A. Woodruff, who heads up technology mergers and acquisitions in Goldman Sachs (GS)’ San Francisco office, has seen the mood shift in Silicon Valley. Tech companies are stepping up their dealmaking after a quiet year. In a span of 21 days, Goldman has worked on three major deals—eBay (EBAY)’s sale of Skype, Adobe (ADBE)’s purchase of Omniture (OMTR), and Dell (DELL)’s acquisition of Perot Systems (PER). “People seem more willing to take out their checkbooks again for the right assets,” says Woodruff.

The surge in deal activity is a sign of broader change: Risk-taking is making a comeback in the tech industry. The first three weeks of September saw $19.3 billion in technology mergers and acquisitions, up from $2.5 billion in August and $11 billion last September, according to Thomson Financial. Meanwhile, more companies are filing for initial public offerings, including such closely watched startups as Watertown (Mass.) battery maker A123 Systems. Venture capital investments are perking up, too. The micro-blogging service Twitter has raised a round of funding that gives the nearly revenue-free startup a valuation of $1 billion, according to several reports.

All this activity is being driven by a central idea: The worst of the recession is over, and it’s time to prepare for better times. Economists and other experts say many corporations put off technology investments during the downturn and are likely to step up spending to generate the productivity gains vital to the bottom line. Mark M. Zandi, chief economist of Mark M. Zandi (MCO), predicts that tech spending in the U.S. will increase 4% in 2010 and 10% in 2011, after dropping 10% this year. “I think we are at a turning point for tech,” he says.

Read the rest of the BusinessWeek story here.

Boutique Investment Banks Continue to Grab Share

Earnings season in the summer of 2009 had made it clear that Goldman Sachs and JP Morgan are emerging as the two giants of the banking world.

But there is another trend in banking that’s gaining steam: Boutique investment banks are continuing to snatch market share in the aftermath of the Wall Street implosion that destroyed giants such as Lehman Brothers, Merrill Lynch and Bear Stearns.

According to the latest figures from Dealogic, Lazard and Evercore Partners seem to be emerging as big winners on the new Wall Street. In the first half of 2009, Lazard ranked as the 7th biggest bank in the global mergers and acquisitions deal market, up from the 11th spot in 2008. In addition, Evercore took the 11th spot, up from the 15th spot last year.

Read of the rest of the post here on BW’s new blog about the Reset Economy.

A Comeback in the IPO Market

Could we see a comeback in the IPO market this year or next year? Here’s the bull’s case in a BusinessWeek story written by Steve Hamm and I, including reporting on a recent Goldman Sachs conference calling for a coming wave of IPOs.

A Comeback in the IPO Market
Recent activity has ended a drought of venture-backed initial public offerings, and some experts foresee a rebound to about 40 a year

Entrepreneurs and venture capitalists took notice just before the Memorial Day weekend when two technology companies had their initial public offerings in a matter of 24 hours. OpenTable (OPEN), a Web site for making restaurant reservations, went public one day after SolarWinds (SWI), a networking software company. The activity ended a drought of venture-backed IPOs that began last August. “It signals that investors are looking for growth stories,” says Robert R. Ackerman, managing partner of Allegis Capital, a venture firm.

Even before the two IPOs, Goldman Sachs (GS) organized an invite-only conference on May 12 in Silicon Valley, called “The Next Wave IPO Forum,” in anticipation of an IPO rebound. Rather than organize multiple meetings around the country, Goldman Sachs invited dozens of venture capitalists and entrepreneurs to a gathering on Sand Hill Road so the bank could explain why it expects an upturn in public offerings later this year. Goldman said it sees 10 to 15 venture-backed companies that have already registered with the Securities & Exchange Commission and that could be ready to go public in fairly short order.

One example: Medidata Solutions Worldwide, a provider of electronic data management software for the health-care industry. “It feels to us like the IPO market is opening up,” says David B. Ludwig, a managing director of Goldman Sachs’ technology, media, and telecom sector in the firm’s Equity Capital Markets Group. “We expect to see an acceleration of filings in the next few months.”

NOT THE BOOM DAYS
No one is predicting a return to the boom-era days when more than 200 companies went public a year, but some financiers and bankers say the market could soon recover to the level of 40 or so venture-backed IPOs a year. To get there, market conditions must continue to improve, more high-quality companies need to file, and their stocks need to perform well after they go public. “Two IPOs don’t make a trend but it’s very hopeful,” says Fred Wilson, managing partner with the venture capital firm Union Square Ventures. “I think we will see the end of the IPO drought for venture-backed companies within the next year, possibly by the end of this year.”

Read the rest of the story here.

Why AIG Should Not Pay Out Any Bonuses

I haven’t written that much on this blog about the financial crisis writ large but given the public furor over the AIG situation I want to weigh in with my thoughts.

I don’t believe AIG execs should get $165 million in bonuses for their performance in 2008. Here’s why:

1. It’s just not right. I don’t think of myself as a moralistic or sanctimonious person but c’mon people! This is just too much to swallow. AIG is one of three companies that the U.S. government had to take over because their collapse threatened the integrity of the global financial system. We, the U.S. taxpayers, own 80% of the AIG, after spending $170 BILLION to save it from collapse (and we’ll probably have to give it even more money). Now, the company wants to pay out hundreds of millions in bonuses to executives who ran a company that helped to drive our economy into a deep recession. I think not.

2. The executives don’t deserve it and they don’t need to be retained. These payments have been called bonuses and retention payments, depending upon who you talk to. Either way you look at it, the company can not justify these payments. Bonuses are supposed to reward performance. Clearly, AIG’s performance was horrific. It’s like a baseball player getting a bonus for taking steroids or striking out every time he was at bat with runners in scoring position.

NY attorney general Andrew Cuomo produced evidence today showing that many AIG employees in the infamous financial products group received bonuses. This is the group that created all these exotic derivatives that caused AIG’s near collapse. That is unconscionable. But even the employees that had nothing to do with the financial products group that ruined AIG should not be paid bonuses since the entire company lost lots of money and had to be taken over by the government.

The second argument, which was actually made by AIG’s CEO, is even more galling. “We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” wrote AIG CEO Edward Liddy to Treasury Sec. Timothy Geithner on Saturday.

Really? Many of these executives were supposed to manage the risk of the firm. Clearly, they did an awful job and should not be seen as stars that need to be retained. Get rid of ’em I say. Moreover, last time I checked Wall Street was filled with tens of thousands of highly qualified and unemployed people. Many of them would be happy to take those jobs at AIG in a heartbeat.

3. Contracts are malleable. This week, New York Times columnist Andrew Ross Sorkin audaciously put forward the best argument for paying out the bonuses: that the government should not break a contract. Sorkin is a great reporter but I have to say he’s wrong about this one.

As one law professor put it, “contracts get repudiated, renegotiated, modified, delayed, worked out, managed — pick the euphemism — all the time.” I know this from personal experience too having covered the tech bust. Giant multi-billion outsourcing contracts were renegotiated many times during that period because both sides knew the contracts did not make sense with business volumes falling off so much.

That’s why I applaud President Obama’s efforts to stop the bonuses. He is using the bully pulpit to pressure and shame these executives to give up their bonuses. I agree the government should not unilaterally break the contracts but it has every right to use its power to get the executives to give up what they don’t deserve. I think he’s going to get his way, and that’s a good thing for Obama and America.

Then we should focus on the bigger issues. Like, why did AIG pay out more than $100 billion of the money the government gave it to counter-parties. Goldman Sachs got $13 billion, Société Générale received $12 billion, and $12 billion went to Deutsche Bank, nearly 100% of what they were owed.

That strikes some financial professionals as egregious. If AIG had filed for Chapter 11 bankruptcy in September, those same firms would have gotten in line with other creditors and received pennies on the dollar. There’s no reason AIG–or the U.S. government–couldn’t have negotiated better terms.

Why Now is the Best Time to Poach Talent

If imitation is the best form of flattery, I feel pretty good this morning.

The lead story on the New York Times Business section, “Secrets of the Talent Scouts,” picks up one big theme I highlighted three weeks ago in my online feature, “Startups in a Downturn,” which revealed the lessons of success from entrepreneurs and financiers who created great companies during past economic downturns.

Heck, the TImes even opened the story with the same guy I led with: venture capitalist Mike Moritz.

I want to return to this theme though because I still think a lot of people in business don’t realize the opportunity that exists now to poach world-class talent.

I’ll give you three examples I heard of just this week. I visited the offices of a Knewton, an online education startup in downtown NY. The CEO Jose Ferreira told me that the talent market is so rich right now that he is actually turning down Harvard grads who scored 1600 on their SATs. Peter Miron, the current chief technology officer of the company, was the former vp of product development of the troubled startup Vonage. He joined the company in May 2008 because he got sick of doing depositions for all of the company’s messy court battles.

Poaching opportunities also exist in big companies. Ferreira is in the market to hire an executive assistant. He said he is going to be able to hire the former EA of one of the top five executives at Morgan Stanley for less than half of what she was making at the bank. When Ferreira first heard people tell him that downturns were a great time to build your business, he sort of laughed. “Now I believe it,” he says.

Think of all the thousands of great people that have been laid off from Wall Street, various media giants such as Time Inc. and Conde Nast, and many other top companies. Even Goldman Sachs, the company that only hires A team players, laid off thousands of people. Where are all those genuises now? If you’re smart and opportunistic, you’ve already hired one of these folks in marketing, engineering, research, whatever.

If you have any open positions in your company, you should be digging through these resumes to find your next great stars. Or even if you don’t have any openings, you might want to make room for that special person who you’re going to need when the economy eventually picks up.

Why the Demise of Lehman Brothers (& Merrill Lynch) Is a Big Blow to the Tech Industry

This Friday, as I sat in my office on the 43rd floor of 1221 6th ave., just around the corner from the fancy new headquarters of Lehman Brothers, I was hit by a combination of shock and sadness.

I know some observers have been suggesting for several months that Lehman Brothers was in big trouble, and that CEO Richard Fuld has always been one step behind the curve of the unraveling credit crisis. But it’s just mind-blowing that the bank appears headed for oblivion.

And then, the unbelievable news came Sunday night that Bank of America reached a deal to buy Merrill Lynch for about $50 billion–about two-thirds of its value of one year ago, and half its all-time peak value of early 2007.

Lehman and Merrill survived the Great Depression and several world wars. But they could not survive the credit crunch of 2008. This is a historic, tragic and disturbing day, as former Deputy Treasury Sec. Roger Altman said on CNBC tonight.

The fall of Lehman and Merrill is horrible news for many reasons. First, losing two of the nation’s largest investment banks overnight is gigantic and historic blow to the U.S. financial industry that will undoubtedly reverberate for months if not years–even if bankers are already saying on CNBC that this is “good for the market.” Credit will tighten further.

If Lehman can fall, and Merrill can be bought for a song, who else could be next when fear and panic rule day? Insurance giant AIG looks like it could the next domino to fall. Where does this leave the two surviving banks–Goldman Sachs and Morgan Stanley?

Second, it’s awful news for the nearly 100,000 people who work for these two giants. It’s the worst-case scenario for Lehman’s 25,000 employees, many of whom had a lot of their net worth tied up in the company stock. Who knows how many of Merrill’s 60,000 employees will survive a merger with Bank of America. Third, the fall of these two American icons is an enormous loss for New York City, and the Big Apple’s reputation, wealth and tax base.

And finally, it’s a big blow to the U.S. technology industry, when you think about it. Besides being one of the oldest investment banks, Lehman was one of the most innovative banks of the last 150 years. Under chairman Robert Lehman in the 1950s and 1960s, it played a critical role in bankrolling many businesses in new industries, including high technology companies.

In 1960, Lehman underwrote a stock offering for American Research & Development, the first venture capital firm to sell stock on the public market (and the subject of my book Creative Capital).

Then, in perhaps the most important story I tell in my book, I show how Lehman Brothers had the courage and foresight in 1966 to take public a little technology company, Digital Equipment Corporation. That IPO, I argue, showed for the first time that people could make a lot of money by investing in and nurturing the growth of a tech startup. It was the first home run of the venture capital industry and the innovation-led economy of the U.S.

Since the 1960s, Lehman helped hundreds of other tech companies raise money. And its success has inspired other banks to follow suit.

Now, with three of Wall Street’s biggest banks either bankrupt or subsumed by a larger entity, that means there are three fewer outlets that can help tech companies raise capital. That means innovation and new business are going to take a hit.

The capital markets crisis in the U.S. tech industry just got a lot worse. And we probably haven’t seen the end of this horror show, based on the velocity of this weekend’s historic events. Fasten your seatbelts, people.

Apple: To Buy Or Not To Buy, That is the Question

For the last few years, Apple has been one of the hottest companies–and stocks–on the planet. But this week, the Apple aura took a huge blow when the company reported softer-than-expected iPod sales and provided earnings guidance below analysts’ expectations. Today, the stock plummeted 11% to $139.

What should investors do now? My gut feeling told me to avoid Apple like a New York City train during cold season. But I’m starting to feel more bullish about Apple after doing some homework. My colleague Peter Burrows provides a pretty convincing case that “there are signs that Apple can not only weather an economic contraction but emerge stronger than ever” thanks to growing strength in its PC business of all things–which produces triple the profit of an iPod.

Mark Kandel from Goldman Sachs actually raised his earnings forecast for Apple (only 3 cents) as a result of “strong Mac growth, increasing iPhone revenue, better gross margin, and a richer mix of iPods.” Toni Sacconaghi from Sanford Bernstein maintained his estimates but wrote that “trading prices (i.e. below $140 share) provide an attractive entry point.” Still, he is cautious, arguing that iPhone expectations “may still be too aggressive”; he also thinks the recession could crimp consumer demand–even for Apple products.

What are you doing?

HOW TO BUY CREATIVE CAPITAL: To pre-order Creative Capital and get a 34% discount, click here and go to Amazon

Why Hewlett-Packard is Goldman Sachs’s Top Tech Stock in 2008

Most investors have been dumping technology stocks this year like a bad date. But if you are bullish on technology, what would you invest in?

In a research note published on Jan. 3, Goldman Sachs technology research team recommended Hewlett Packard as its top tech stock for 2008 (in addition to IBM, Ingram-Micro, and Seagate). Why? GS says HP lies at the intersection of three trends:

1. Tech valuations remain low; Goldman says the overall price to earnings ratio of tech hardware stocks is below the S&P 500.

2. PCs have more staying power than people realize, even with “further slowing in the US and Western Europe.”

3. Tech demand from small and medium-sized businesses should outpace corporate spending in 2008.

 I would add two more reasons to be bullish on HP.

1. Excellent management: Mark Hurd has been working wonders over there.

2. Overseas Exposure: HP maintains the highest percentage of overseas sales of any large cap tech company, deriving 67% of its sales from outside the slumping US. That compares to 61% for IBM, 45% for Cisco, 44% for Dell, 39% for Microsoft and 32% for Yahoo!

Wall Street Newsflash: Laura Conigliaro, one of the smartest tech analysts on Wall Street, has recently changed jobs and become co-director of U.S. research at Goldman Sachs. David Bailey, who told me the news a few days ago via email, has now taken over coverage of tech hardware. Congrats Laura and David!

HOW TO BUY CREATIVE CAPITAL: To pre-order Creative Capital and get a 34% discount, click here and go to Amazon