Notes of Note from John F. Ince

John Ince Interviews with Thomas Weisel, Founder of Montgomery Securities and Thomas Weisel Partners

Introduction: Tom Weisel, graduated from Stanford University in 1963 Harvard Business School in 1966,  has now been in the investment banking industry for 35 years.  He was the founder of Montgomery Securities and guided the firm to national stature, particularly in the high tech area.  Twelve months after Montgomery was acquired by Bank of America in 1997, Weisel left to start Thomas Weisel Partners.  Barely two years later, the Thomas Weisel Partners website boasts that they are the are the fastest financial services startup in history.

Ince: So you’ve managed to to get off to a fast start.  Can you compete with the big boys in an industry where many of them are getting even bigger and starting to offer a one stop shop for financial services?

Weisel: By the way, we could have made that statement even bolder and said we are the fastest startup in history, not just the fastest financial services startup.  To my knowledge no other startup has attained revenues of $186 million the first year and $500 million in the second, as we have done. Obviously I think we can compete with the big boys.  Yes, you’ve got some of the finest financial institutions in the world merging and clearly their strategy is to build global institutions, with a breadth of products to retain and grow their client base.   But I personally think that many of these mergers are not going to work.    The more thoughtful growing corporations in America aren’t interested in a one stop shop.  Instead they’re interested in two things the big firms are not delivering.  They’re interest in quality ideas and bulge bracket execution capability?

Ince: What do you mean by bulge bracket?

Weisel: Bulge bracket means top six investment banking operations in the United States. This is not just my opinion. The world defines bulge bracket that way to include Morgan, Goldman, Merrill.  The next three kind of change but today it includes Solomon, First Boston, and then the sixth is open to question right now, because of all the mergers, the definition of who is in the bulge bracket is changing as we speak.

Ince: How is the trend toward mergers and acquisitions changing the underlying competitive dynamics of investment banking?

Weisel: Basically, it’s eliminating competitors.  It allows firms like ours to grow with less competition.  You look at who the top 10 or 20 competitors were ten years ago and you’ve just eliminated a lot of them.

Ince: Since the Netscape IPO companies have been going public at a much earlier stage in their lifecycle, and often investors know little about these companies at the time of their IPO.  What’s causing all this and are the public markets performing a venture capital function?

Weisel: In 1999 and the first quarter of 2000,  many companies with dubious business plans were able to raise venture capital money in the public marketplace.   It allowed companies to get capital way earlier than they should have.   There were a lot of things contributing to that.  During  that period,  online retail assets went from $300 billion to a trillion.  Then you had the trend towards momentum investing in the institutional world. This was exasperated this by the incredible of Tsunami of capital that flowed for the first time into the public markets from the online retail investor.  They bid up indiscriminately the values of anything in the retail world that was broadly defined in the Internet space whether that be commerce, bandwidth or infrastructure.   Many companies went public that should have stayed private, and it lead to the volatility in the stock market.  These were not real intelligent investors.  These were “mo” investors (Momentum investors).

Ince: Has this trend started to institutionalize volatility into the stock market?

Weisel: No,  All that came unwound in April and May of 2000.  Today companies have to have a lot more substance in terms of a verification of a business model and verification of products before they can go public now versus that 15 month window.

Ince: So has the March/April shakeout changed the investment tenor?

Weisel: I think so.  But  on the other hand when you have the kind of multiples on earnings and revenues that you have in some areas of the marketplace, that is going to create tremendous volatility.  A combination of the online retail investor going from a very small to a large part of the marketplace, and the ownership of these companies,  along with very high valuations of these companies–that is a cocktail for volatility–the likes of which the capital markets have never experienced.

Ince: How does one navigate through such volatility?

Weisel: Focus and deep domain expertise is a critical valued added component.  The marketplace is not one size fits all. The nuances between companies even in the same space have never been greater.  Corporations need to be very very smart about when and how they access capital markets to their advantage.  They’ve got to make volatility their friend and not their enemy.

Ince: Will we continue to see these high multiples?

Weisel: It depends on the industry and the company.  In the main companies, are valued on the basis of their potential in the marketplace, and many of these marketplaces are just so new that people just don’t know how big it is.  Is it $10 billion, $30 billion.  That’s the function of a firm like ourselves, to bring some context.

Ince: What do you think about the so called “new”  techniques of evaluating these companies?

Weisel: Many people are justifying ridiculously high prices, by using supposedly new metrics. But the marketplace is not really changing the method of valuation.   If an investor falls into that trap, he’s going to lose a lot of money.   This all about marketplace

Ince: Let’s talk for a moment about the pricing issue.  Do you think the Dutch auction has merit as a pricing technique?  Will it ever catch on in a major way?

Weisel: The Dutch auction has been used for decades in pricing secondary auctions.  It’s a smart way of raising money for a company that is already public.  It makes no sense for IPOs.  It was a failed concept from the very beginning.  What company wants to price their IPO at the maximum high they possible can get because of supply and demand?  That makes absolutely no sense, because you are doomed to failure from the very beginning.  The stock has no place but down to go.  You’ve got nothing but upset shareholders.  You’ve got future options and employees that are under water.  It’s a virtual cycle.

Ince: But doesn’t it maximize the amount of money a company raises in an IPO?

Weisel: It maximizes the price, but the capital raising function is a two way street.  Both the issuer and the buyer need to win.  You’ve got to leave something on the table–future profitability for the buyer as well as the seller.  By the way,  the owner of companies doing IPOs are not selling.  They need to maintain and increase the price over the next year or two so they can exit and realize their investment.  So if they’ve ???? top ticked??? the stock price in raising capital, all of which goes in the company and not to them, that’s a failed strategy.  So what you want to do is price things where it’s most probably going to sell given no change in the environment or comparable company’s stock prices.  If you’re going to sell something at 50% or 100% higher than it would be rationally compared to, just because of a supply – demand imbalance, then you created in the offering, that doesn’t make a lot of sense and it’s a disaster waiting to happen.

Ince: Why?

Weisel: Because rational investors will eventually become rational and the stock price ought to come down to where that company should be valued relative to other comparable companies.  That’s essentially what most investment banks do.  They look at what other comparable companies are valued at and make a judgement based on the differences between the market opportunities, the product the management team and then attempt to price the company relative to those ideas.

Note:  This interview was originally published in Upside Magazine in 2000

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