Deals May Strain On Refco News;

Cowen is Latest I-Bank To Test IPO Waters

Colleen Marie O'Connor (colleen.oconnor@sourcemedia.com)

Investment Dealers’ Digest, April 3, 2006

Societe Generale hopes to take advantage of the hot M&A market and the stellar performance of recent investment bank IPOs from the likes of Thomas Weisel Partners and Greenhill, to offload most of its stake in Cowen & Co. Should the Cowen deal also fare well, talk is that others could follow.

Despite some initial doubts, the stocks of Greenhill and TWP have been stellar performers. All of the recent hoopla aside, Greenhill shares treaded water for months after its IPO priced in May 2004. The M&A boutique raised $87.5 million with shares priced at $17.50 and the stock closed last week at $66.50.

TWP, couched as a tech and healthcare-centric investment bank, raised $90 million in February at $15 per share but not before some uneasiness. Goldman Sachs dropped out as a joint bookrunner shortly before the IPO was to price, evidently over a disagreement about the timing of the deal. There were concerns about whether investors would respond to the transaction given that TWP had lost $14.2 million during the first three quarters of 2005 while other investment banks were chalking up record profits. However, the shares closed on the first day at $19.90 and are now at $23.

"There was a belief that [TWP] missed the boat, that they had put all their eggs in one basket," said Tom Taulli, author of Investing in IPOs and a frequent IPO market commentator. The adroit investors that participated in the IPO are benefiting from a considerable pickup in deal flow at TWP this year. According to Thomson Financial, TWP's IPO underwriting volume was $551.9 million as of March 27, 2005, up 523% from the same period last year. Its year-to-date secondary underwriting volume, at $358 million, is up 300% over the same time frame.

"It has been very interesting to see the reception the public markets have given to investment-banking companies such as Greenhill and Thomas Weisel Partners," said Craig Johnson, president of JMP Securities, a San Francisco-based investment bank catering to small and midsize companies. "It certainly speaks to what I believe is a real re-emergence of middle-market investment boutique banks."

M&A paving the IPO route

The current M&A cycle is driving IPO opportunities for investment banks. "CEOs' growth agendas and hence underwriting and M&A are back in full swing-most banks have excellent pipelines," said Anuj Bahal, a senior managing director at FTI Consulting. "It is a great time for good businesses involved in M&A to go public." If boutiques had tried IPOs in 2001-2003, it would have been much more difficult, he noted.

Part of the appeal of recent investment bank IPOs is their tightly focused niches. "It's really more advisory services," said Bahal. "They don't have massive lending, propriety trading or research desks." As the larger investment banks become more diversified, opportunities have opened up for these types of shops. "Their pitch versus the larger banks is independence and conflict-free advice," he adds.

"In the area of investment banking, a firm thinking about an IPO should be well-regarded in a specific, growing niche because theirs is a service business with a number of highly qualified competitors already in place," says Francis Gaskins, president of IPOdesktop.com, which provides IPO research.

With Cowen now firmly in queue, there is already speculation about a deal for Joe Perella's yet-unnamed new advisory boutique. Evercore, another high-end boutique, is also thought to be lining up an IPO. ECM bankers also say keep an eye on Pacific Growth Securities, JMP Securities and Think Equity Partners.

An IPO appears to be one option of many on JMP Securities' plate over the next two to five years. "We are assessing all our prospects, but we don't have any immediate [IPO] plans," said Johnson, who worked with Thomas Weisel for 18 years at Montgomery Securities. "We like our independence. The public markets is one of many things that we would consider sometime in the future."

A spokesman for Pacific Growth Securities said an IPO was not on the radar. ThinkEquity Partners did not return calls.

"Investment banks can move easily, and on a dime. With trading in the sector improving and more upward momentum in the equity markets overall, there are signs that growth in the IPO market should continue. These firms could decide to become players," Taulli said.

IPO activity from smaller, middle-market investment banks dried up as the sector was absorbed in a series of acquisitions in the late 1990s. Hambrecht & Quist sold out to Chase Manhattan, Montgomery Securities was bought by NationsBank, and Robertson Stephens was acquired by Banc of America, to name a few.

Gaskins estimated that an IPO from the sector would have to be at least $80 million in size, and the investment bank would need a market cap of at least $240 million to garner institutional interest. Cowen hopes to raise $100 million, according to a regulatory filing.

Cowen will lead manage its IPO along with joint bookrunners Credit Suisse and Merrill Lynch. Keefe, Bruyette & Woods and Sandler O'Neill are also on the distribution team. The proceeds will go to SocGen, along with a dividend payment. Following the IPO, its SG Americas Securities Holding unit will retain an 11.2% stake in Cowen. Cowen's Chairman and CEO, Kim Fennebresque, signed a contract in February that keeps him on the job through December 2007.

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