Dennis Dietz 

Bloomberg.com
May 2, 2003

San Francisco, May 2 (Bloomberg) -- William Hambrecht gets behind the wheel of his Toyota Solara convertible one or two days a week to drive through Silicon Valley, stumping for investment banking business. He says he's not finding much right now.

He's the same William Hambrecht who in 1968 founded Hambrecht & Quist Group, the first of the technology-oriented West Coast investment banks. He helped take public Apple Computer Inc. and Genentech Inc. In 1996, his firm managed 42 initial public offerings with a combined market value of $1.9 billion.

Now, Hambrecht may as well be prospecting in Death Valley as in Silicon Valley.

"I've never been as busy with as little result to show for it,'' Hambrecht says.

Wall Street West, as the San Francisco banking community is known because of its role in technology finance, is reeling. Since 1996, the number of IPOs underwritten by local firms has plunged 95 percent, to five from 103, according to Bloomberg data.

More than 4,000 financial-services jobs have been lost in the region, according to California employment records.

Technology underwriting firms that were the envy of East Coast investment bankers in the 1990s -- Hambrecht & Quist, Montgomery Securities Inc. and Robertson Stephens Inc. -- no longer operate under those names.

Scrambling for Business

J.P. Morgan Chase & Co., which now owns Hambrecht & Quist, is scrambling for all the business it can get and is consulting with clients for free more than usual to make sure the company hangs on to them, says Cristina Morgan, vice chairman of investment banking.

The Internet boom and bust evokes the frenzy of Northern California's 1849 gold rush, which drew thousands of prospectors who failed to find riches, says Warren Hellman, chairman of Hellman & Friedman LLC, a 20-year-old San Francisco-based private equity firm that's raised $4.8 billion.

``We went from a bubble to a bath,'' Hellman says.

While it's a grim picture, Wall Street West isn't dead, says Tully Friedman, who arrived in San Francisco in 1970 as a general partner at Salomon Brothers Inc. and now is a founding partner of Friedman, Fleischer & Lowe, a private equity firm that's raised $2.1 billion.

Technology won't stay down forever, and local firms will remain in demand because they feed Silicon Valley through research, finance and trading in the shares of its companies, he says. ``Companies are looking for judgment and expertise, and the local firms provide it,'' says 61-year-old Friedman.

Resurgence Predicted

Hellman, 62, Friedman's former partner, predicts a resurgence of small investment banks that could ultimately become big ones, following the path of Hambrecht. As established bankers retrench, such firms as Rutberg & Co. and Seven Hills Group LLC, which arrange mergers and equity investments, have emerged.

William Wisialowski, 43, one of five partners at Seven Hills, says he and another founder, Cabot Brown, helped shape the firm as they sat at an April 2001 San Francisco Giants baseball game in which Barry Bonds hit his 500th home run.

He says Seven Hills is handling transactions that large investment banks typically avoid: mergers valued at $10 million to $100 million. The firm has handled eight transactions since the start of 2002, its first full year in business, according to its Web site. ``We finished our first year at a profit,'' Wisialowski says.

Moving On

Rutberg & Co. founder Bryan Rutberg says he left his job as head of domestic Internet investment banking at UBS Warburg LLC in 2000, as the IPO boom ebbed. He says he'd met his work goals and wanted to move on.

Rutberg, 33, opened his firm in 2001 in a scruffy neighborhood where he had to shoo transients from his doorstep. He's now in better offices, although bare walls and random piles of research give the place a helter-skelter look.

Rutberg, who specializes in wireless communications companies, says the low overhead has helped him turn a profit this year. ``Small companies get pushed down the food chain by the bigger banks,'' he says. ``That's the gap we're filling.''

In the 1990s, life on Wall Street West was anything but spare. Montgomery Securities hired rock and blues stars such as Boz Scaggs to entertain investors who showed up at the firm's annual investor conference at the Ritz-Carlton.

Overnight Millionaires

The firm's founder, Thomas Weisel, acquired a prized collection of Willem de Kooning and Wayne Thiebaud paintings and sprinkled them around the firm's Transamerica Pyramid offices.

The IPO boom, spawned by new communications technology, created overnight business empires and instant millionaires. Credit Suisse Group's Credit Suisse First Boston set out in 1998 to build a technology underwriting business under Frank Quattrone, 47, who'd been hired from Deutsche Bank AG.

For two years, Quattrone's team contributed up to 15 percent of CSFB's revenue by taking more technology companies public than any other firm.

Computer programmer Marc Andreessen, then 24, increased his net worth by $58 million in one day by taking a new company public. Andreessen cofounded Netscape Communications Corp., developer of the first Internet browser.

The company went public on Aug. 9, 1995, setting off the Silicon Valley IPO boom. In 2001, Andreessen took another company public: Internet site manager Loudcloud Inc., now known as Opsware Inc. Neither Netscape nor Loudcloud ever made a profit.

Business soared at the San Francisco investment banks in the 1990s. Annual revenue at Montgomery Securities rose to $700 million in 1997, up from $100 million in 1990. Robertson Stephens helped underwrite 44 companies in 1999, 30 of them Internet- related.

`End of an Era'

Hambrecht & Quist earned $49.4 million in 1995 after reporting a loss of $10 million in 1991.

Now, those technology investment firms are gone. ``It's the end of an era,'' says Sanford Robertson, who cofounded Robertson Stephens. That firm was at the heart of the Internet decline, with $94 million in losses over six quarters through June 2002.

It was closed a month later by its owner, FleetBoston Financial Corp. In 1999 and 2000, the firm was taking companies public at the rate of three a month and raising $5 billion, according to Bloomberg data.

Hambrecht & Quist was bought for $1.35 billion in 1999 by Chase Manhattan Corp., which acquired J.P. Morgan & Co. for $32 billion in 2001. Montgomery Securities was originally bought in 1997 by San Francisco-based BankAmerica Corp., which was acquired by NationsBank Corp. a year later.

The company, now called Bank of America Corp., runs its investment banking operations from New York.

Three Years of Losses

Weisel, 62, who left Bank of America in 1998, has started over as head of Thomas Weisel Partners LLC. Hambrecht left Hambrecht & Quist in 1997, and he founded W.R. Hambrecht & Co. a year later. Both firms are struggling.

Thomas Weisel Partners says it's fired more than 300 of its 800 employees since 2001 as its U.S. mergers and acquisitions business plummeted to $1.2 billion last year from $62.3 billion in 2000, according to Bloomberg data.

Hambrecht, 67, a vigorous man who bikes his age in miles on his birthday every year, says his firm has had losses for the past three years; he won't disclose how much. He says it's tougher for his firm than for other investment banks because he's trying to offer IPOs a new way.

IPOs traditionally have been sold by investment banks that set the offering price and collect fees for managing the transaction. Hambrecht created what he calls an IPO auction system, whereby Internet bidders set IPO share prices.

New IPO System

He says the system is fairer and less expensive. The firm's headquarters is located in a warehouse to save money. ``We fly JetBlue and watch our pennies very carefully,'' Hambrecht says.

Hambrecht's firm last year scored the only Internet IPO by a San Francisco firm since 2000 -- a $39 million offering for Overstock.com Inc., a Salt Lake City-based retailer of discounted kitchen supplies, jewelry and sporting goods. He snagged more of the company's business in February, when he handled the $22.5 million sale of an additional 1.5 million shares.

Overstock founder and Chief Executive Patrick Byrne says large investment banks courted him to handle the company's IPO and that he selected Hambrecht because of his belief in the auction system.

The traditional IPO system allows price manipulation and creates conflicts when investment banks reward clients with shares of an offering, Byrne says. ``The IPO allocation process really is the root of all evil,'' he says. Overstock shares closed yesterday at $8.71, down 33 percent from the IPO price.

Hambrecht says he's bidding to do IPOs for at least two dozen companies once the market revives. Overstock's was the seventh the firm he did through auction. Others include Ravenswood Winery Inc. and Salon Media Group Inc. ``We'll do some offerings this year, but nothing like 1998 and 1999,'' he says.

Fourth-Quarter Loss

J.P. Morgan has managed one IPO since 2000: for San Francisco- based insurer U.S.I. Holdings Corp. Overall, the bank had a loss of $387 million in the fourth quarter -- the worst for a U.S. bank since 2001 -- and it's fired more than 12,000 workers since the bear market began in 2000, Vice Chairman Marc Shapiro said in a January memo.

J.P. Morgan's West Coast units moved last summer into a new, 31-story office building on the fringe of San Francisco's financial district. The bank says it signed a lease for the building's entire 650,000 square feet during the bull market, when employees were in crowded quarters three blocks away.

J.P. Morgan is now trying to sublease a third of the space because it isn't being used, says spokeswoman Nancy Israel.

Handling Mergers

J.P. Morgan's Cristina Morgan says the company is trying to fill the IPO void partly by handling mergers. They include the planned $2.5 billion acquisition of Scios Inc., a biotechnology company, by Johnson & Johnson, the world's second-biggest maker of medical products.

Morgan, 50, says the company is also handling bond transactions, including a $300 million sale of debt in April by Computer Sciences Corp., the third-largest U.S. computer-services company.

Just because the IPO market has withered, Morgan says, it doesn't mean she ignores clients -- even if they don't pay for consulting advice and even if she doesn't have much to show for it sometimes. ``I pretty much work for free,'' she jokes.

That's how it was earlier this year, when Prashant Gupta, a founder of CrossWorlds Software Inc. -- which was bought last year by International Business Machines Corp. for $129 million -- visited for advice on a future startup, Morgan says.

`Just Hello'

``We've financed him twice, and the first time he called, it was just to say hello,'' Morgan says. ``Any number of clients call up and want me to help them work through something. I'm certainly not going to say I can't help. This is my job. There'll be some day when they'll need a transaction done, and hopefully they'll remember that I've been helping them for years.''

Morgan, who joined Hambrecht & Quist as an analyst in 1982, says she has another mission these days: helping H&Q employees who lost their J.P. Morgan jobs find new ones.

``We're planning a get-together to get everybody in a room to see who's still on the market,'' she says. ``We need to make sure we don't forget that someone might be a perfect fit for a job we might know about.''

Rutberg, one of the new bankers in San Francisco, says he took time off after leaving UBS Warburg and couldn't get rid of an itch to start his own firm. He says he chose to specialize in banking for wireless companies, even though they'd fallen out of favor with investors.

Wireless Companies

He says the industry still has promising companies, some of which will want to merge with each other and will need investment banking advice. ``We have better information about wireless companies than any other firm in the world,'' he says.

When he got started, Rutberg lined up such investors as Craig Johnson, 56, founder and chairman of Venture Law Group, which specializes in technology companies, and Michael Murray, 58, former Bank of America vice chairman.

He gets capital through relationships with more than 400 venture firms and institutions, he says. Rutberg projects he'll do 10 transactions this year and says he plans to expand this summer into coverage of companies that produce technology to make the Internet run better.

``Bryan's the quintessential entrepreneur,'' Johnson says. ``He's determined and disciplined.''

Century of Banking

Commercial banks and securities firms have been part of San Francisco's business fabric for a century. Bank of America, then called Bank of Italy, started in the city in 1904.

Discount broker Charles Schwab Corp. began in San Francisco in 1971, and Dean Witter, the securities firm that's now part of Morgan Stanley, opened in San Francisco in 1924.

Until takeovers and moves to suburban offices intervened, San Francisco through the 1990s was the headquarters of such companies as Chevron Corp., now ChevronTexaco Corp., the second-largest U.S. oil company; insurer Transamerica Corp., which was purchased by Dutch insurance company Aegon NV; and Southern Pacific Rail Corp., which was acquired by Union Pacific Corp. in 1995.

Hambrecht is a transplanted New Yorker who came to San Francisco in 1965 to manage the West Coast office of securities firm Francis du Pont & Co. In 1968, he teamed up with George Quist, a small-business investment specialist from Bank of America, to form Hambrecht & Quist.

Good Timing

The partners built an investment banking business that specialized in companies that were developing computers and their components. Their timing was apt: Three years later, Ted Hoff, an engineer at Intel Corp., now the world's largest chipmaker, scored a Silicon Valley milestone when he invented the microprocessor -- a computer brain on a silicon wafer.

A year after Hambrecht & Quist started, the firm faced competition. Robertson, then a partner at Smith Barney, says he also saw the potential of computers.

In 1969, he joined with two Smith Barney colleagues -- Robert Colman and Ken Siebel -- to form Robertson, Colman & Siebel. Siebel, a former professional basketball player, is a cousin of Thomas Siebel, who now heads Siebel Systems Inc., the world's largest maker of customer service software.

Robertson Colman started by specializing in research about the valley's companies. Ten people worked in a small office that rented for $800 a month. ``We made money the first month,'' Robertson says.

Weisel, the other West Coast banking pioneer, was a Harvard MBA whose first securities job -- in 1967 -- was as an analyst at Hutchinson & Co., then the largest investment bank in San Francisco.

Weisel left in 1971 and landed at Robertson Colman. A year later, he became a partner, and his name was added to the firm's name.

Investor Conferences

Robertson Colman's investor conferences, established in 1971, became a model, drawing hundreds of money managers to hear companies' pitches, Weisel says. Hambrecht's work attracted Morgan Stanley, now the second-largest securities firm by capital, which began helping him handle Silicon Valley IPOs -- including Apple's.

Robertson Colman began breaking up in 1976, when Siebel left to start a money management firm. Then Robertson and Colman quit in a power dispute with Weisel, according to a new book about Weisel's career: Capital Instincts (John Wiley & Sons, 2003), cowritten by Weisel.

They started what ultimately became Robertson Stephens. Weisel changed the firm's name to Montgomery Securities, after Montgomery Street, which ran through the city's financial district, according to the book.

`Ponzi Game'

Silicon Valley's growth drew New York-based C.E. Unterberg Towbin and Alex. Brown & Sons Inc. from Baltimore, which started San Francisco operations in the 1970s.

Those two firms were joined in the 1990s by Goldman, Sachs & Co.; Lehman Brothers Inc.; and Morgan Stanley. By 1999, with the IPO boom under way, Hambrecht & Quist, Montgomery Securities and Robertson Stephens had been taken over.

Then the frenzy ebbed. Many of the Internet-related companies whose shares had soared immediately after going public quickly closed or shriveled, including Stamps.com Inc., a provider of postal services for computer users; Critical Path Inc., an e-mail services company; and Value America Inc., an Internet retailer.

``That period was a variant of a Ponzi game,'' says private equity specialist Friedman. ``It was all hits and eyeballs and had nothing to do with whether the business was a success.''

The region's emerging companies will depend on a resurgence of investment banking in San Francisco, says Michael Lazarus, 47, managing partner of Weston Presidio, a San Francisco venture firm with $2.3 billion under management that's invested in such companies as JetBlue Airways Corp. and Staples Inc.

``You need cash to get to the goal line,'' he says.

New Difficulties

Robertson, 72, now chairman of Silicon Valley-based Francisco Partners LP, the world's largest technology buyout firm, says he worries investment banks will be stunted because stock exchanges have switched to decimal pricing of shares and because of new difficulties in financing research.

The switch from fraction to decimal pricing has reduced profit margins in trading, he says. Securities firms are under pressure from regulators to separate research from investment banking because of conflict-of-interest concerns.

On Dec. 20, New York State Attorney General Eliot Spitzer, along with the U.S. Securities and Exchange Commission, reached a preliminary settlement in which 10 securities firms agreed to pay $1.4 billion in fines and promised to separate research from investment banking.

Thomas Weisel Partners, one of the 10 firms, withdrew from the settlement on April 1, according to the California Department of Corporations. Weisel Partners is negotiating for a separate settlement, says Kam Melzer-Coveyou, a spokeswoman at the department.

No More Euphoria

Robertson says conditions that hurt investment banking help San Francisco-area buyout firms.

He says he finds that many companies have ill-fitting divisions they want to sell, pointing out his firm's role last year in chipmaker AMI Semiconductor Inc.'s acquisition of a division of STMicroelectronics NV, Europe's largest semiconductor maker.

Whatever shape finance in San Francisco takes, Hambrecht and Friedman say there'll be no return to the euphoria of 1999, when one in six stocks doubled in value on the Nasdaq Stock Market and 37 gained more than 1,000 percent in one year, according to Nasdaq.

The Nasdaq Composite Index closed yesterday at 1472.56, down 71 percent since the peak of the computer-related boom in March 2000.

At best, the market in computer-related shares will go back to the levels of the 1980s, when earnings grew at a rate of 8 percent, Hambrecht says. Before that, Wall Street West has a long way to go to climb out of the deep hole it fell into three years ago.