There aren't too many initial public offerings of venture-backed companies that don't have Pacific Crest Securities in the co-manager spot.
The 21-year-old technology investment bank, headquartered in Portland, Ore., has built a consistent business out of helping to take these companies public. It has underwritten a raft of IPOs this year including Ubiquiti Networks Inc., Imperva Inc., Brightcove Inc., Carbonite Inc. and Boingo Wireless Inc.
The full-service bank also covers a universe of 235 stocks. But it's the way it covers those companies that makes the firm unique, says chairman and CEO Scott Sandbo. Pacific Crest's research and sales teams focus only on technology, which enables the firm to have deeper relationships with large investment funds, he says. They also take a broad, thematic approach to research rather than focusing on stock picking.
Sandbo, 50, joined Pacific Crest in 1992, after working on leveraged buyouts in Continental Bank's corporate finance department. He helped restructure Pacific Crest in 1998 to bring it to its current technology focus. The Deal magazine recently spoke with Sandbo and Terry Schallich, 49, Pacific Crest's head of equity capital markets.
The Deal magazine: It seems like your name is on pretty much every venture-backed IPO. Why is that?
Scott Sandbo: Our work on IPOs is an outcome of a differentiated strategy. Back in 1998, we decided to focus our entire firm on technology-enabled connectivity. Others, especially in San Francisco, like Robertson Stephens, Montgomery, Hambrecht and Alex. Brown, were focused more on multisector growth.
So back then, we effectively did a restart. As the Internet was hitting critical mass -- during what we now know was the first wave of the Internet -- we knew there would be select opportunities for value creation. Now we're in the second wave, and Pacific Crest is at the center. We operate at the leading edge, where the dual forces of connectivity and globalization are driving technology's largest, most disruptive expansion cycle ever. We provide our clients with a competitive advantage by interpreting the key trends and drivers of value creation in the industry's high-growth sectors, such as global Internet, mobility, social media, big data, cloud-based services and technology infrastructure.
Our research is very thematic. When you combine that with our sales force, which also focuses exclusively on tech, you get much stronger and deeper relationships with key tech investors on the buy side. This is part of our intellectual capital development. Unlike many other firms, our guys spend 100% of their time on tech.
Do you generally pick up coverage of the stocks you help go public?
Sandbo: We pick up coverage on all of them. Some are smaller, some are midcap. We are market-cap agnostic. We'll follow someone if they are public or not; if they have interesting technology or an interesting business model, we'll follow them. Involvement with high-multiple companies is a consistent theme across our firm.
In M&A, you play in the same general space as many boutiques. But you are also a full-service firm with sizable research and sales teams. How can you afford to offer all these services at a time when middle-market banks are struggling or being absorbed by larger institutions?
Sandbo: A while back you could see there would be pressure on commissions at boutiques or middle-market firms. We felt we needed to provide something beyond stock picking. We have built an intellectual capital product over the past 12 years that is at a whole different level of value and differentiation.
A lot of midsize banks got caught in the middle and drove a lot of business in the 1990s off the trading desk. You used to need $50 million on the desk to aggressively trade; now it's probably $10 billion. We always knew we were in the intellectual capital business, not the financial capital business.
The bulge brackets can weather that storm, but a lot of midtier firms don't have the balance sheet to play with the big guys.
What's your view of tech M&A in 2012?
Terry Schallich: M&A continues to be extremely robust, and we expect this to continue throughout next year. We're bullish around 2012, particularly in the first half of the year before we have to contend with the election cycle.
It's been the macroeconomic dynamics outside of tech that have driven the vagaries of the capital markets in the last half of this year. Most of the companies we've taken public, the market leaders and most of the scale private companies have continued to grow their top and bottom lines. They continue to become more valuable by the day.
Large incumbents in technology are still sitting on a ton of cash, and domestic incumbents aren't experiencing the same organic growth they used to. They are very active in talking to our M&A and sector bankers about potentially interesting companies they should be looking at.
What needs to happen for IPOs to once again be a viable choice for venture-backed companies, as opposed to M&A?
Sandbo: I think pushing the idea of getting back to $40 million, to $50 million IPOs is tough. There are structural issues. The trend in the fund world is consolidation and bigger funds, so in order to have an impact on a portfolio they have to hold a bigger amount than they needed 20 years ago. Trying to attract research to these small companies and the economies of commissions make it very difficult.
We are not following the companies in the aftermarket to trade a lot of their stock. We follow them because they have really interesting business models. They probably won't trade a lot until they get bigger, but we're still attracted to them.
There's no quick fix to the IPO issue. It's an unanticipated and negative outcome of making the trading business so skinny. Companies that would have gone public 10 or 15 years ago don't have the viability and won't be an institutionally relevant public company. For example, the $200 million market-cap company will have an easier exit through M&A than by way of IPO.