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Tech Industry

Boutique banks ride market downturn

Small investment banks that help tech companies argue that they're better prepared to ride out the market downturn than Wall Street's huge investment banks.

For boutique banks, small can mean survival in a tough market.

Small investment banks that help technology companies are brushing off some analysts' predictions that they'll be swamped in the market downturn, arguing that they're better prepared to ride it out than Wall Street's huge investment banks.

"The big guys have very large cost structures and need to capture a certain amount of revenue to break even," said Mark Shafir, director of investment banking for Thomas Weisel Partners. "We don't have as much fixed costs and are pretty lean. Also, because we're a partnership, the only money I make is a result of how profitable we are. The bigger banks, however, have a lot of managing directors who are paid a lot of money."

The boutique banks--which handle everything from underwriting IPOs to advising companies with mergers and acquisitions--cater to small companies largely ignored by big investment banks. They also attract some larger companies because of the niche technology they offer and work closely with venture capitalists, who like to see their portfolio companies go public or get acquired.

But as the market tank, and IPOs virtually vanish, some industry watchers say these small boutique banks with limited revenue streams are poised to blow up and go away.

The boutique banks have seen the companies in their portfolios get hammered or driven out of business by the downturn. Companies that may have stood a chance of launching an IPO with the banks' help in the markets heady days are now struggling to stay alive and turning more to their venture capitalists for help in raising capital. These banks, which earn their commissions when a merger is completed, are finding there are plenty of sellers but few buyers, as their clients have become more wary of snapping up companies using their depressed stock as currency.

But Scott Ryles, chief executive of boutique bank Epoch Partners, said his company did expect a bear market at some point--just not so soon.

"But we have plenty of capital to grow the company and backers who view us as trying to create a structural change in the marketplace, as opposed to just being an IPO play," said Ryles, former head of technology investment banking for Wall Street behemoth Merrill Lynch.

The market drop has already affected the larger banks, with layoffs planned at many large investment banks from FleetBoston Financial's Robertson Stephens to brokerage house Charles Schwab. Robertson Stephens cut 5 percent of its work force last week, largely because of market conditions, a spokeswoman said.

Meanwhile, Epoch, Weisel Partners, and WR Hambrecht, all founded within the last three years, say they are doing well. Epoch is continuing to hire, while Weisel Partners and WR Hambrecht have said they don't plan any layoffs.

Nonetheless, one investment banker from a large institution has his doubts about the viability of these new boutique banks.

"Boutiques will have a harder time (than large investment banks) because of their limited revenue streams," said one banker, who requested anonymity. "The large banks have multiple industry groups, huge trading arms, multiple products from currency derivatives to treasury-based services that can help pay the bills and keep the lights on in a down market."

The boutique bank managers agree and note that they are nimble enough to tweak their business plans to survive. "There's no question that a more diversified revenue stream will help you do better in a more difficult environment," Shafir said.

Weisel Partners is expanding beyond the tech sector to include such consumer-related deals in the leisure and retail sectors. Weisel Partners, which is profitable, offers private equity and asset management, brokerage services, mergers and acquisitions, underwriting, and private placements. Most of its revenues comes from institutional trading, a $200 million-plus business that grew more than 200 percent last year over the previous period.

Sandy Robertson, former chairman and founder of Robertson Stephens and now founder of investment company Francisco Partners, said such a move makes sense.

Banking on other services
"Technology has been such a boom that it'll take the boutiques a little longer to come out. But these firms are growth-oriented, and while their tech business is quiet, they may be able to spend more time in bio-tech, specialty retailers or the insurance industry," Robertson said.

Epoch is taking a different approach, using the time to expand its footprint in its existing businesses, underwriting equities, trading, and mergers and acquisitions, Ryles said. Epoch has an arrangement to distribute deals to customers of online brokers Schwab, TD Waterhouse Group, and Ameritrade.

Additionally, the boutique banks expect to retain the same type of customers and companies that landed at their doors during a bull market. Small to midsized companies will still frequent the boutique banks, because the large investment banks tend to avoid them, said Diana Yates, a financial services analyst with A.G. Edwards.

Such is the case with WR Hambrecht, said Clay Corbus, senior managing director. His company offers an auction-like system for participating in an IPO, as well as handling mergers and acquisitions, private equity, trading and corporate services.

"When valuations contract to a $20 million to $40 million range, we can do those deals where the (large investment banks) do not," he said.

Many of these smaller banks may go public themselves, said Tony Meneghetti, who heads up Deutsche Banc Alex Brown's West Coast technology investment group and has gone through the transition of a boutique bank to large investment bank.

"It's unlikely they'll merge with each other because the cultures are different; they have different business models and different types of leadership. And all the large acquirers have already done their acquisitions," Meneghetti said.

Despite the challenges, none regret launching their operations.

"I have no regrets, none soever," Shafir said. "Our revenues probably wouldn't have ramped as quickly, and we may not have gone after some of the sectors that we initially did, but our model is so powerful, we would have gone forward regardless of the environment."