Jeffrey Goldfarb
MENLO PARK: The easy, gridlock-free drive from San Francisco to Menlo Park
these days is perhaps the most emblematic sign of the times in this high-tech
mecca.
Technology visionaries used to inch impatiently in traffic on southbound
Interstate 280 for the 35 miles toward Menlo's gold-paved Sand Hill Road, where
venture capital firms financed their dreams and investment banks took them
public and shopped their companies to eager buyers.
Today, though, the brown, sun-scorched grass along the highway symbolizes
just how much things have dried up.
The brown placards that festoon marquees of low-rise commercial complexes on
Sand Hill -- once riddled with the bland names of investment firms that
inevitably incorporated the word "Capital" -- are increasingly blank.
"Space for lease" signs instead blight the three-mile strip.
Silicon Valley's high-powered deal makers have seen a staggering drop in
business. Just a short three years ago, investment bankers with technology
expertise frantically were rushing initial public offerings to market and
forcing lucrative, but often ill-conceived, mergers. Now, they just try to help
clients survive.
"We're grief workers now instead of empire builders," lamented one
tech banker, who requested anonymity to keep from alienating companies he
advises and other potential clients. The statistics are support the anecdotal
tales of woe. Investment banks advised on just 81 technology deals worth about
$7.8 billion in first quarter 2002 compared with 146 deals worth about $94.7
billion in first quarter 1999, according to market research firm Thomson
Financial.
Dismal earnings and a hazy outlook on Corporate America's technology spending
plans have left chief executives wary of what acquisitions could do to their
already shaky stocks. "M&A is out of favor with investors," said
another California-based investment banker. "The market hates it."
New agenda
Instead of juggling four or five deals at a time as they did just a few
years ago, merger advises instead spend their time coddling clients, or
"building relationships," as many of them call it. By staying in close
contact with companies, bankers hope to better shape and understand their
clients' business models and long-term plans. That way, when confidence returns,
they will have gained trust and proven themselves to CEOs.
That has been tough to do, though, as Wall Street firms have slashed their
banker ranks, either by cutting jobs or by reshuffling the sectors in which they
work. Turnover can hurt their chances to retain business. "I had one client
tell me we were hired because we were the only ones pitching business with the
same folks who went in two years ago," one banker said.
Specialized banks, such as Robertson Stephens and Broadview International,
that once catered to tech start-ups, have been hit hard, too, as their larger
rivals have swooped in to handle the small deals they previously would have
ignored. Both banks have held talks with potential buyers.
"I haven't seen a Robbie Stephens banker at a deal in 18 months,"
one banker said. The few deals struck take far longer to get approval as
directors scrutinize financials and management looks around every corner for any
signs of instability. Bankers say conference calls that took an hour now take
five hours and deals that took six weeks to close now take four months.
Many executives finally have accepted that their stocks will trade for about
$5 a share, not $100, and are entertaining offers, bankers report. However,
buyers are still waiting for some hint of a turnaround in profits or tech
spending to even consider acquiring a rival.
"I have a hard time recommending to a lot of people that they buy
something," one investment banker confessed.
Grim reality
The 200 biggest public companies in the San Francisco area, most of which are
technology firms, lost a combined $77.7 billion last year, a stunning reversal
from the combined $116.2 billion profit they booked the previous year, the San
Francisco Chronicle reported last week.
The profound impact of those numbers stamped on their faces, sadsack
investors moped around one of the industry's biggest and oldest conferences last
week. Attendance at the 30th annual JP Morgan H&Q technology conference
plummeted 23 percent from its peak last year to 3,260 people, the lowest figure
since 1994 -- before the world discovered the Internet.
"This is some of the worst sentiment I've ever seen," said Gary
Nackerson of Firelake Research. "In a lot of ways, it's even worse than
last September." Question-and-answer sessions between investors and
corporate management were testy.
Nackerson and others complained that executives focused their paltry upbeat
comments on tiny industry segments and avoided discussing the critical broader
markets. During the past two years of the bear market, companies and investors
have tried to maintain a smiling face and remain confident that the future would
be bright. But now, a deep sense of melancholy and nostalgia have set in.
In a standing-room-only presentation by outgoing Sun Microsystems Inc.
President Ed Zander, the microphone failed, the air-conditioning shut down and
waiters, in an effort to finish promptly, whisked away the cookies and other
afternoon treats. "No air, no food, no fun," Zander muttered.
"Remember the good old days?"