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OpenIPO and Lots More

Slowly, but surely, investment-banking firms are coming to Seattle.

Last year, Goldman, Sachs & Co. created a permanent perch here. And in mid-January, WR Hambrecht & Co. moved into the Bank of America Tower downtown.While New York-based Goldman Sachs epitomizes the investment-banking establishment, California’s WR Hambrecht & Co. is more of a maverick. It caters to smaller, younger companies that bigger investment banks are likely to pass on, and it’s championing a pretty radical way to go public — the online IPO auction (see “Dutch Treat” at right).

At the helm of WR Hambrecht & Co. is no other than William R. Hambrecht, the industry pioneer who co-founded Hambrecht & Quist in 1968 and sold it to Chase Manhattan four years ago. Hambrecht’s Seattle office is headed by J.D. Delafield, a Harvard MBA with a strong interest in East Asia. Before helping start WR Hambrecht & Co., Delafield worked in northern China for Coca-Cola and in Singapore for Morgan Stanley Dean Witter. Below, he tells what he’s doing in Seattle.SJ
Seattle24x7: Why is WR Hambrecht opening a Seattle office in the midst of a tech-industry shakeout?
Delafield: Seattle has many things in common with San Francisco and Boston [where Hambrecht also has offices]: a lot of money; a lot of smart people; a good research university; good services infrastructure (commercial banking, legal and accounting). But the one thing that is notably missing in Seattle is investment banking, and that’s a major hole in the fabric of support that emerging companies need.

Seattle has never had a go-to investment bank for emerging-growth companies, a la Hambrecht & Quist, Robertson Stephens, Volpe or Alex Brown. A lot of people have commented on this fact, but very few have done anything about it. And that’s why we’re here. We’re interested in being a source of capital and advice for high-growth, early-stage companies. Because our focus is on early-stage companies, I think we’ll only be occasionally competing in Seattle with the “bulge” firms (Morgan Stanley, Goldman Sachs, First Boston).

Seattle isn’t just a high-tech market. There are six sectors that are incredibly vibrant here, but I don’t think most of the country realizes this: (1) software; (2) Internet; (3) financial services; (4) branded consumer; (5) biotech; and (6) telecom, wireless in particular. Not all these sectors have been troubled recently.

Seattle24x7: Of the six sectors you mentioned, are you targeting any in particular?
Delafield: No, we’re targeting all sorts of early-stage growth companies. If you look at the size and the development stage of some of the deals we’ve done–such as the IPOs for Andover.net and Ravenswood Winery–you’d see that these are deals that Goldman Sachs would find difficult to do. Such companies tend to be below the radar screen of the more established investment banks. But this certainly doesn’t mean these are not good companies or that people won’t make money investing in them.

Seattle24x7: Hambrecht & Co. will be the lead underwriter only on IPOs that use the firm’s OpenIPO system, basically an online dutch-auction of shares (see “Dutch Treat” at right). What kind of reception is your OpenIPO approach getting in Seattle so far?
Delafield: We’ve gotten a better audience in Seattle than in many other markets–New York, Boston, San Francisco included. I think that’s because people here are more independent-minded. Also, in 1999 and 2000, many companies that had no hope of creating real value for shareholders went public. And when you’re one of these, who cares what process you use to go public? You rush out the door, get as much money as possible, and hope you get liquid before the thing collapses.

The focus again is on companies that have demonstrated intrinsic value. And when you have a company like that, the pre-IPO owners tend to care a lot more about an efficient way to raise capital, which is what our auction-based IPO provides.

Seattle24x7: What kinds of services will you be providing in Seattle?
Delafield: A full suite of investment-banking services:
***Underwriting (IPOs and follow-up offerings of stocks and investment-grade bonds). We will be talking to some of the large-cap borrowers locally about our debt product called OpenBook, which Dow Chemical used in August 2000 for a $300 million bond offering [the first online auction of corporate debt].
***Mergers and acquisitions, both the buy and sell side.
***Private Placements; we’ll act as an agent for companies looking to raise money).
***Brokerage services; we’ll sell both research and deals to institutional and individual investors).
***Private Equity; we’ll invest in promising private companies.

Seattle24x7: No doubt, a lot of Seattle companies will be interested in your Private Equity activities, given the ice-cold IPO market. How does that work?
Delafield: So far, we’ve invested about $150 million in 57 companies, including some in the Seattle-area, such as Quinton, N2H2, GreatFood.com [bought by 1-800-Flowers]. Accredited investors who have accounts at WR Hambrecht (accounts can be opened online), are invited to co-invest with us. These are not funds. We set up a separate partnership for each investment. The firm, WR Hambrecht & Co., takes a position, Bill Hambrecht himself takes a position, and then our clients are offered a portion.

Essentially, WR Hambrecht backstops a total investment amount and apportions it between itself, Bill Hambrecht and interested customers. This is a much more attractive model than that of a Garage.com, in that we’re not an agent for this product. We are a principal, and people are investing along side of us.

Seattle24x7: What kind of requirements do you have for Private Equity deals? Do you, for instance, require that companies be profitable? Or will you listen to three people with a great idea?
Delafield: We don’t have any specific requirements for Private Equity deals. The only way you can gauge a company, particularly in the early stages, is to ask: “Would you put your own money into that?” We never offer something to our customers without first answering that question.

Soula Jones is Content Chief at Seattle24x7.

WR Hambrecht & Co.
Seattle office: 701 Fifth Ave., Suite 3800
Seattle, WA 98104
Phone: 206-254-4100
Seattle employees: 4
Total WR Hambrecht employees: 250
Other offices: San Francisco, Boston, New York, Philadelphia
# of OpenIPOs so far: four (Ravenswood Winery; Salon.com; Andover.Net; Nogatech)

Dutch Treat
WR Hambrecht’s “OpenIPO” allows companies to go public by auctioning shares online. Here’s how it works: Say you’re WeRWireless Corp. looking to sell 6 million shares, and investment bankers think the shares will fetch anywhere from $12 to $15. In an OpenIPO, accredited investors come to WR Hambrecht’s website and tell the investment bank what they’re willing to pay.

Assume the following bids come in:
***2 million shares at $19;
***1 million are bid at $18
***1 million at $17
***2 million at $16
***and a whole bunch of offers below $16.

The clearing price is $16, because at that price WeRWireless can sell all of its six million shares. People who bid above $16 will get all the shares they wanted. Those at $16 will get pro-rated amounts. And those below $16 get nothing.

Bottom line: investors get the stock at $16, even if they bid higher. Also, WeRWireless pays less in underwriting fees. WR Hambrecht charges 5.5% to 6.5% (vs. 7% for traditional underwriters).—SJ