In The News

Size Isn't Everything for One New Boutique

Investment Dealers' Digest
by Avital Louria Hahn

Monday, April 19, 2004 - In October, executives of TippingPoint Technologies Inc. had already sat through pitches from three investment banks when they learned that a new investment banking boutique, America's Growth Capital, had opened for business six weeks earlier.

John McHale, CEO of the Austin, Texas-based TippingPoint, a network security company, had worked with the two founding partners of AGC-Ben Howe, former head of M&A at S.G. Cowen, and Maria Lewis Kussmaul, a long-time ranked analyst also at S.G. Cowen. So when McHale and his board, who knew and liked the two partners, learned of the launch, they decided to give AGC the mandate to lead the PIPE deal (private investment in a public entity) that they were planning. "It was very simple for us" because of the respect he and his directors had for the two, says McHale.

"We set out to raise $15 million," he adds. "But AGC created so much demand in concert with our effort, we decided to extend the offer."

AGC, founded eight months ago, is a Boston-based investment bank that focuses on small-cap companies. With a focus on technology and soon-to-be-added life sciences, they have already signed six deals. Among them: its first role as a co-manager alongside Merrill Lynch & Co. and J.P. Morgan for an initial public offering, the $69 million debut of Oasis Semiconductor Inc., which was filed last month. It also acted as a co-manager with Goldman Sachs on a separate follow-on equity offering.

AGC, which has research, banking and trading, has grown to 40 employees from its original two founders. It opened a San Francisco office in March that generated a deal in its first week of operations. A New York office is also planned.

"We don't position ourselves as the only firm out there," says Howe."But we would distinguish ourselves as players who built the firm differently-with high-caliber analysts, with a personal touch, and with a desire to build a place with a common culture and a vision of hard work and high integrity."

AGC's strong start has a lot to do with the talent and experience of its bankers and analysts. It has had a strategy of hiring only senior analysts at a time when many Wall Street firms are dropping coverage of companies and turning more and more to junior talent. AGC also doesn't hesitate to do things differently: It pays bonuses twice a year, for example, and keeps fixed salaries low, paying most of its compensation in bonuses. The boutique is able to attract senior talent in large part because it is 95% owned by its employees - "a critical piece of the design," says Howe.

Critical timing

Another reason for its success is timing, which enabled Howe and Kussmaul to build a lean operation.

While Howe and Kussmaul had talked about starting a boutique on and off since 1995, it was at the end of 2002, when Howe's contract with S.G. Cowen ended, that they decided to strike. Most of their planning took place in the first half of 2003, when the market was weak and emerging growth industries like technology, a core area for AGC, were shunned by investors. The Street had completed several rounds of layoffs, and banker and analyst compensation was down. Real estate values in Boston, where AGC is headquartered, had melted as well, enabling the two partners to get a good deal on their office space and support services.

"There was no better time, ironically, than when things were the bleakest to start the business," says Kussmaul. "Our strategy was to enter the market with a low cost structure."

Such a structure is key, Howe adds, to living through a pullback. "That's the biggest challenge even today that the larger boutiques still face," he says.

Lower costs are also handy when it comes to setting fees. AGC unashamedly acknowledges that its fees are lower than those of many banks. "We are a newcomer with a great value proposition," says Howe. "But as a newcomer, we are coming in and taking less than the Cowens and Weisels of the world, and are perfectly comfortable doing that."

Being lean and quick was typical of Kussmaul's and Howe's working style even before they formed AGC. And it's something that Lionbridge Technologies CEO Rory Cowan knew from previous dealings with the two. So when Lionbridge eyed Mumbai, India-based Mentorix in September, it turned to AGC to advise on the acquisition, instead of the many investment banks it had worked with, because speed was critical. "The reason we chose them," says Cowan, "[is] they assembled a team over the weekend. Most groups would still be negotiating an engagement letter by the time they had the majority of their work done."

AGC emphasizes its senior talent as a differentiating trait

"The [AGC] analyst who covers our company is a senior person," says Peter Gyenes, CEO of Essential Software. Having mostly experienced senior people is "a distinguishing feature of a firm like this," he says.

"There is a big need for firms like them because of all the changes on Wall Street," says Rick Kimball, managing partner of Technology Crossover Ventures. "They are hungry, they are aggressive. So I think that as long as they stay focused-I think they should do very well."

Entrepreneurial seeds

Both partners were exposed to finance and entrepreneurialism early in their lives.

Howe got his first taste of business as a teenager, when his father bought several acres of cornfields near Concord, Mass. In lieu of an allowance, the father gave the children a plot of land and told them to farm it for their income. Working those fields and bringing his crop to market, Howe says, enabled him to pay his own college and graduate school tuition, as well as the tuition of several of his siblings.

Kussmaul, who grew up in Northern New Jersey, got her first taste of investing from her father, who brought home a stock-and- bond game and also gave the kids shares of consumer companies. After graduate school at Wharton, she worked at Salomon Smith Barney, where she was one of the first analysts to cover the emerging telecom equipment sector in 1983. She was also one of the first ranked analysts in that sector-and went on to be a ranked analyst for 13 consecutive years, later working in wireless and Internet infrastructure.

She met Howe at S.G. Cowen. She was in research, he was in banking, but the two discovered they had similar working styles and interests. Both are high-energy, say people who know them. When Howe's contract expired, he says, "it was time to build the company we wanted to be part of. And in our eyes, there was no better time."

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