In The News

Long-distance relationships

The Boston Globe
by Scott Kirsner

Monday, February 07, 2005 - At this time last year, Bob Weiler was conducting a beauty pageant. His Waltham company, Phase Forward, was planning to go public, so Weiler and his board invited a succession of investment banking firms in to make their pitches. Like a line of Miss Americas explaining their 10-point plans for eradicating split ends, the bankers flew up from New York to explain how they would manage a seamless IPO for Phase Forward, which sells software that helps drug companies run clinical trials.

Only one Boston investment bank was part of the pageant: America's Growth Capital, a relatively new (and small) bank founded by Ben Howe, who formerly ran the Boston office of a New York bank, SG Cowen & Co.

Ultimately, Weiler chose Thomas Weisel Partners, a San Francisco bank with an office in New York, to lead his company's initial public offering. Why not go with the local player? One reason was that America's Growth Capital hadn't led an IPO before.

''Boards are very conservative right now," Weiler says. ''In a difficult mark , do you want to be the first IPO that this firm has done? The board can never be criticized for going with one of the big guys."

This may sound Pollyanna-ish in a world where Fleet, John Hancock, this newspaper, and soon, Gillette, are no longer owned locally, but here goes:

Wouldn't Boston's tech and biotech communities be much better served by thriving, local investment banks that were capable of taking local companies public?

America's Growth Capital and Adams Harkness, an investment bank founded in 1937, are the only two independent local players capable of doing initial public offerings. (Tucker Anthony, a onetime IPO purveyor in Boston, is now owned by Royal Bank of Canada.)

AGC is still trying to carve out a reputation, by co-managing offerings with other banks -- a less lucrative proposition than leading them.

And Adams Harkness is trying to regain its stride, after reducing its employee ranks in 2004 and installing a chief executive, Kevin Dunn, last month. The firm is also still reeling from dramatically lower trading revenues -- thanks to competition from online exchanges -- and the separation of investment banking services from research, which makes it tougher to hire and retain great research analysts.

Venture capitalists don't complain about the lack of local investment banks; most of them seem content that New York and San Francisco bankers are willing to fly to Boston to talk with them about their most promising portfolio companies.

''In the last two weeks, I've met with eight banks who've come up because they want to talk and build relationships, from Raymond James to Wachovia to SG Cowen," says Woody Benson, a general partner at Prism Venture Partners in Westwood. ''We've been very busy on matching up banks to our portfolio companies."

''We work with firms because they've got talented people, and they're right for an assignment," says Bruce Johnson, a managing general partner at TA Associates in Boston, ''rather than whether they're Boston- or New York-based. "

But while the importance of geography is supposedly diminishing in the 21st century business world, there can be a qualitative difference when a bank is based in Boston.

''You suffer on the relationship side" when you work with a distant investment bank, says Roland Thomas, chief executive of Moldflow, a Wayland software company. Adams Harkness took the company public in 2000, and led a follow-on stock offering in 2001. When bankers live in town, bumping into tech and biotech executives at cocktail parties, industry events, and Sox games -- not to mention easily driving over for a visit -- they can more organically track the progress of fast-growing companies, and respond to their investment banking needs, whether it's an IPO, a follow-on offering, a merger, or an acquisition.

''It's not that companies in Boston don't get any attention from i-banks," says Howe at America's Growth Capital. ''But they clearly get less attention than companies in the New York area or in Silicon Valley. They get bankers coming to their door when there's a transaction at hand. That's not relationship banking. The value of a relationship is advice on a regular basis, because that banker knows your company and is in the community."

And not to be too boosterish about it, but investment banks based in Boston keep their commissions from all those deals -- often adding up to millions of dollars -- in Boston.

''There's a loss over the long term of jobs and income associated with investment banking," Thomas says. ''That has a real financial impact on the Commonwealth and the city."

Of course, few companies will choose an i-banker based on hometown pride. And some New York banks, like Morgan Stanley and Deutsche Bank, have maintained a steady Boston presence even through the IPO drought of the past five years, and can serve local companies commendably.

Still, I have to wonder whether the tendency for Boston tech companies to be acquired, rather than to go public, isn't in part connected to the lack of solid, big-name investment banks based here.

(What we do have plenty of are advisory firms that help facilitate mergers and acquisitions, like Broadview, Mirus Capital Advisors, and McNamee, Lawrence & Co.)

If the locally rooted investment banking community were stronger, would we have seen companies like Telica, Connected Corp., eDocs, and Yantra -- all touted as promising IPO candidates -- sold over the course of 2004?

What will help to strengthen the Boston investment banking scene is, not surprisingly, a rebound in the IPO market. That will both help Adams Harkness get back on the horse (the company was involved last year in a failed IPO for an Oregon company called Synetics Solutions) and help America's Growth Capital build a track record.

''Right now, you have a greater percentage of people choosing to have a large New York firm manage their IPO, not because they expect better service in the aftermarket, but because they want to have an insurance policy that the deal will get done," says TL Stebbins, a managing director of investment banking at Adams Harkness.

That's what Bob Weiler wanted when he held his beauty pageant. (His company wound up raising only half as much in its July 2004 IPO as it had hoped.) ''The IPO market is still quite conservative," he says. ''It's not flourishing yet."

The Moscow connection
Steve Orenberg's noncompete agreement expired Saturday. He took Sunday off, and is starting a new gig today, as the first president of the US division of Kaspersky Lab in Woburn.

Orenberg previously ran US operations for Sophos, a British antivirus company with US offices in Lynnfield. He left that company in early 2004, as Sophos shifted its emphasis in North America to an office in Vancouver. Now that his noncompete is no longer in force, he's helping Kaspersky Lab, a Moscow company, to establish a US foothold.

The company will be a rival of Sophos, selling software to businesses to help them combat viruses, worms, spyware, and spam. Unfortunately, it's a fast-growing market.

Orenberg says Kaspersky will have about 20 people working in its new Woburn office by March 1, handling marketing, sales, and tech support for North America. (Product development is done in Moscow.) Orenberg believes Kaspersky's responsiveness to new security threats will help differentiate the company from competitors like Sophos, Symantec, and McAfee.

''Everyone sees new viruses at roughly the same time," Orenberg says. ''The game is, how quickly can you develop an antidote?"