With a mere eight venture-backed companies having completed initial public offerings so far this year, it wouldn't be accurate to say that there's a lot of underwriting business up for grabs now that Lehman Bros. [LEH] and Merrill Lynch [MER] are out of the equation. But if it's true, as National Venture Capital Association president Mark Heesen asserts, that "out of fire and destruction come the seeds of change," then today's turmoil on Wall Street could be paving the way for some second- and third-tier investment banks to pick up some business when the depressed IPO market recovers.
NVCA data lists both Lehman and Merrill Lynch as two of the top five underwriters of venture-backed IPOs between 2004 and 2008, and even if Bank of America Corp. [BAC] assumes all of Merrill's business as it acquires the firm, that would still leave the room for others to assume the business of now bankrupt Lehman. It's entirely possible that the remaining bulge bracket firms could pick up all the slack, given that in recent years Morgan Stanley [MS], J.P. Morgan Chase & Co. [JPM.BA], and Goldman Sachs Group Inc [GS] have commanded a lot more underwriting business than boutique banks.
But if there's a real or perceived shortage of competition among the most prominent underwriters, then young companies will start seeking alternatives, Heesen predicts, citing Cowen Group Inc. [COWN], Jefferies Group Inc. [JEF] and Piper Jaffray Cos [PJC] as promising up-and-comers.
Of course, this is a purely academic discussion at the moment. The number of companies going public this year is way down from the 86 that completed IPOs last year, and with most investors half-waiting for yet another shoe to drop on Wall Street, the rebound in the IPO market is a back burner issue for most. Moreover, the comeback of the boutique firm has been forecast for years, with only Piper Jaffray cracking the above cited list of top ten underwriters of venture backed companies.
Moreover, these smaller banks are uniquely challenged to carve out a niche where they can compete with larger players, without becoming overly specialized in a way that exposes them when market conditions turn. Thomas Weisel Partners Group Inc [TWPG], which was founded 10 years ago as a specialized bank catering to startup companies going public, has suffered a dramatic reversal of fortune linked to the IPO window slamming shut. -Andrea Orr
See April 11, 2005 story on up-and-coming boutique banks from TheDeal.com
See May 19 story on Thomas Weisel Partners from TheDeal.com
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