Silicon Valley Biz Ink – Friday, January 2, 2004
By Dennis Taylor
It was a fish that grew weary of swimming upstream. Broadview International, LLC, the privately held merger-and-aquisition advisory in Foster City, was swallowed by Los Angeles-based investment bank Jefferies & Co. for an undisclosed amount on Dec. 18.
Broadview was one of last holdouts in Silicon Valley’s shrinking investment banking sector. Since the collapse of the initial public offering market in 2000, Merrill Lynch shut its valley office, Montgomery Securities was swallowed by Banc of America Securities and Credit Suisse First Boston has Frank Quattrone’s former group of bankers in Palo Alto on short leashes.
Other boutique firms with a taste for technology, such as Robertson Stephens and Hambrecht & Quist, also failed to survive the malaise as independent firms. Broadview specialized in technology deals in the mid-market realm, typically deals valued at less than $500 million. It would be easy to criticize Broadview’s strategy of focusing on one stratum of one industry sector during a time when tech M&As were as energetic as an Alabama Sunday.
“But I’d disagree with that,” argues Ron Lissak, managing partner and founder of San Francisco-based Catapult Advisors, an M&A advisory that went head-to-head with Broadview on three deals in 2003, walking away with two of them.
Lissak, who’s previous investment banking experience included leading Montgomery Securities’ international division and an early stint at Soloman Brothers, believes the problems Broadview experienced were the result of swimming too far upstream
Broadview used to play solely in the sub-$100 million stratum, directly competing with firms such as Catapult and Alliant Partners. There, Broadview built a “stellar reputation” as a deal-maker, Lissak says. Broadview advised on 20 M&A deals in 2003, including Santa Clara-based Nvidia Corp.’s acquisition of MediaQ Inc. and Milpitas-based GRIC Communications Inc.’s acquisition of Axcelerant. Broadview did not provide the value of those deals.
“Then they moved up market because they wanted to compete with Goldman [Sachs] and Morgan Stanley,” he says. “They built a large infrastructure to support that, and while it’s easy to build up costs, it’s hard to shrink them. When they were sticking with their knitting, they were very effective.”
And the result of challenging Morgan Stanley and Goldman Sachs?
“They got their teeth kicked in,” Lissak says.
Broadview chairman and CEO Paul Deninger declined requests for an interview for this article. Other Broadview executives also declined interview requests, citing the holiday schedule. Former Broadview co-chairman Stephen Smith did not return calls requesting an interview. While Broadview opted not to talk about its past troubles, others, both on and off the record, pointed to Broadview’s transition from a pure-play advisory to more of a full-service investment bank as the cause of its troubles. Problems surfaced after it jumped from the $100 million to the $500 million market, and while considered mid-market in the M&A industry, clients at that altitude want additional services, Lissak notes, including lines of credit and the ability to lead secondary offerings.
Yet Broadview didn’t have the balance-sheet capabilities of the big banks, which made it difficult to compete with the likes of Goldman Sachs and Morgan Stanley.
Not widely known is that Broadview explored the possibility of entering the brokerage business, offering research, sales and trading as a way to grow out of its corner, Lissak says.
When the current became too strong for Broadview to continue its assault on the big banks, it looked to competitors as potential suitors. Broadview held well-reported negotiations with both Goldman Sachs and UBS, the biggest bank in Switzerland.
None of banks involved will discuss the prior negotiations, but in a Dec. 19 interview with the New York Times, Broadview’s Deninger said the reason he liked the Jefferies deal over the others is because he’s confident the Los Angeles bank will allow Broadview to focus on the smaller growth companies in Silicon Valley and other technology centers.
Now that it knows there will be a tomorrow, Broadview is signaling a return to its roots — M&As of young technology companies.
For Jefferies, the acquisition fits ideally into its growth strategy, providing a niche of highly specialized bankers. “A significant presence in the technology sector is key to our building the leading firm serving middle-market investors and issuers,” said Jefferies chairman and CEO Richard Handler in a written statement.
The merger will push Jefferies from the No. 20 position, in terms of number of deals, to the No. 9 slot just behind UBS and ahead of Banc of America Securities, according to year-to-date data compiled by Mergerstat. Broadview initially will retain its name and will be a wholly owned subsidiary of Jefferies Group Inc., the parent of Jefferies & Co. Capital markets services will be melded into a new division called Jefferies Broadview. It’s still unclear what the long-term fate of the Broadview brand will be, but competitors believe it will only hurt Jefferies to undermine the autonomy of Broadview.
“Historically when a company like Jefferies buys a bank like Broadview, they’ll squeeze the goose until it stops laying golden eggs,” Lissak says. “But there are cases, like Silicon Valley Bank’s acquisition of Alliant Partners, that made Alliant a more formidable competitor.”
Jim Kochman, CEO of Alliant Partners, a boutique M&A firm acquired by Silicon Valley Bank two years ago, nods to the compliment, adding that there is more to the equation than the mutual respect between his firm and Silicon Valley Bank. “I attribute our success after two-and-a-half years to the fact that we [Alliant and SVB] have the same client set,” Kochman says. “That’s not the same with Broadview and Jefferies, so we’ll have to wait and see whether one plus one equals two or one-and-a-half.”
One Jefferies representative, who asked not to be quoted, pointed to the quality of M&A specialists employed at Broadview, who will provide needed leverage as Jefferies expands its effort to capture market share in middle-market deals.
Kochman did acknowledge that if Jefferies handles Broadview as it did the 2002 acquisition of aerospace M&A specialist Quarterdeck Investment Partners in Los Angeles, which to Kochman’s understanding has gone well, then the pairing may work.
Jon Kutler, CEO and founder of Quarterdeck was traveling out of the country last week and was unable to comment on the status of his firm’s acquisition by Jefferies. Quarterdeck continues to fly its own flag, and has not been folded into another Jefferies division.
One thing is certain, as Broadview begins the new year, it will now have some added muscle to use for its upstream push.