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How corporate acquisitions killed the tech market
The acquisition of four companies in 1999/2000 were hugely damaging to the technology sector. Can anyone replace them?
I was a investment banker, equity analyst and entrepreneur during the dot com boom (yes, I managed to do all three in a short space of time). Four companies, more than any others, exemplified that period.
Am I talking Netscape, AOL, Alta Vista and Amazon?
No. I mean Robertson Stephens, Hambrecht & Quist, Montgomery and Alex. Brown. If you haven’t heard of them, I’m not surprised. They were American boutique investment banks who specialised in the technology sector.
They were essentially unique. They worked with entrepreneurs all the way through their lifecycle. They helped with early stage fundraising, bridge financing, Initial Public Offerings (IPOS), follow-on financings, M&A deals and exits. They even had departments focused on helping newly-minted founders manage their personal wealth.
Most importantly, they were structured to be able to help companies float at a relatively early stage of their lifecycle. Amazon floated with a market capitalisation of $438m in 1997 (I had a tiny involvement in that deal), while other good companies went public with market valuations of $100 million or so.
By offering venture investors a partial exit, founders a liquidity event (i.e. allowing them to take some wealth of the table) and private investors an opportunity to partake in investing in hot new companies, these four investment boutiques were essential to the thriving startup scene of the end of the millennium.
So what happened to the boutiques
The success of these four companies in working with some of the hottest companies around attracted acquirors:
- Alex. Brown was acquired by Bankers Trust in 1997. (Banker’s Trust was subsequently acquired by Deutsche Bank in 1999, which gave me a chance to work with many of the talented bankers there for several years)
- Robertson Stephens was acquired by Bank America in 1997. (Subsequently, Bank America merged with Nations Bank, which had bought Montgomery, leading to the sale of Robertson Stephens to Bank Boston)
- Montgomery Securities was acquired by NationsBank in 1997.
- Hambrecht & Quist was acquired by Chase Manhattan Bank in 1999.
These four companies were instrumental in nurturing technology companies through the 80s and 90s, and were a key part raising money through the dotcom boom. Robertson Stephens alone raised $5.5 billion for startups in 1999/2000, even after the acquisition by Bank America and the subsequent game of corporate pass-the-parcel.
Of course, not everything these companies did was helpful. They helped stoke the dotcom bubble and subsequent crash by bringing lots of companies to market (although my experience was that the companies promoted by these four advisors were generally high quality because the bankers there knew their stuff). They had cosy relationships with senior entrepreneurs which may not always have been in the best interests of public investors.
But they allowed a steady flow of companies to go public. This in turn provided a range of new companies to inspire entrepreneurs or acquire startups. When they were bought and then shut down by their new parents, American capitalism lost something.
What did American capitalism lose?
It lost a route to market. It lost accountability. It lost transparency.
How so? Let me ask you this: what do Facebook, Twitter, Zynga and GroupOn have in common?
Apart from being four of the greatest tech successes of the past half-decade, all of them have raised eye-watering amounts in private transactions:
Ten years ago, these companies would have been public companies by this stage in their lifecycle. They would have transparent accounts so we could all see what is working and understand the dynamics of these new business models. They would offer small investors the opportunity to invest in the big new thing. They would be getting coverage from the financial pages with hard numbers, not rumour and speculation. They would have currency for acquisition. They would become a source of exits for other startups.
I can’t blame all of this on the acquisition of four boutiques. Being public has become a pretty horrible place to be. Between regulation, investor short-termism and the unpleasant media scrutiny it brings, going public has rarely been less attractive. Especially when you can raise the same amount of money by staying private.
The private exchanges where these investments take place are only open to a handful of people. John Gapper of the FT expects a scandal to hit the “bubble in pre-IPO shares” in 2011. They may not be a long term solution.
What we really need is some full-service boutiques serving the entire startup community. Maybe it’s too late. Maybe the market has changed so radically since 1999 (more stringent regulation, more nervous public market investors, lower capital requirements for startups).
But I miss having high-quality tech specialist, early-stage boutiques. I think they would help the start-up ecosystem grow and thrive. Without them, the only exit seems to be for one of the big technology companies to acquire startups).
That doesn’t lead to a new and vibrant technology sector. It leads to an oligopoly.
I don’t think that would help anyone.
What do you think? Are there boutiques out there fulfilling these functions? Do we even need them any more?
GroupOn, Facebook, Zynga