Peter A. Blackwood is a Managing Director, and heads the Technology & Media investment banking group at Philadelphia-based Janney Montgomery Scott LLC, a bank whose roots go back to 1832, and probably the most prominent mid-Atlantic regional full-service investment bank, broker-dealer and asset manager (with more than $55 billion in assets under management). Prior to joining Janney in 2009, Peter was a Principal and Head of the Internet & Digital Media Group at Merriman Curhan Ford & Co. He joined Merriman from SoundView Technology Group, and began his career at E*OFFERING, a startup investment bank later acquired by SoundView. He went to school at Ohio Wesleyan University.
I met Peter at Merriman not quite 10 years ago when we were working with a digital media company headquartered in London, which was at length acquired by a larger digital media company that Peter had worked with. We had a chance to talk on April 16 about the current state of the technology industry vis-à-vis investment banking, and what he foresees for 2013 in terms of deal flow, what he sees as “hot” in technology these days, and what kinds of public and private deal structures are most common in this market.
JA: How is 2013 compared to 2012 in terms of deal flow?
PB: The first few months of 2013 have been busy for us. A number of transactions we were working on last year were delayed as people worried about the negotiations in Congress over the sequester, and moved into this year. In the first quarter our team was quite busy executing and completing these transactions, as well as evaluating and pitching new business opportunities. With regard to Q2 and the balance of the year, we are witnessing a marked increase in activity with regard to public offerings, both with companies selecting underwriters and working through the registration process.
JA: Interesting that you mention IPOs first. What is the situation these days with regard to IPOs vs PIPEs?
PB: Over the past 2 years, PIPEs, or Private Investments in Public Equities, have fallen somewhat out of favor. Today traditional unregistered PIPEs from the mid-2000s are few and far between. We are seeing a preference for Registered Direct (RD) offerings, and even more for CMPOs or Confidentially Marketed Public Offerings, a variant of RD offering. Both the CMPO and Registered Direct offerings are based on shelf registrations, but the Registered Direct is an agented offering and the CMPO is an underwritten offering.
Many issuers now prefer a CMPO structure because it opens up the number of institutions that can participate due to the underwritten vs. agented format. Some institutional investors have charters that restrict their ability to buy agented offerings vs. underwritten offerings – which means they are excluded from Registered Direct offerings, because they are not underwritten, even though they are fully registered and tradable. The difference is that the CMPO provides a publicly-filed prospectus supplement prior to pricing, even though it is marketed to a limited number of institutional investors, so the fact of the offering is public knowledge, and it can be underwritten by the investment bank. As a result, CMPOs have been quite popular over the last few years.
With that said, this year we are beginning to see a bit of resurgence in structured deals, or PIPEs. We are learning that buyers are more risk-friendly now than they have been for a few years, and are looking to invest in structured deals, which are most commonly PIPEs with common stock and warrants, with registration being filed only after the deal is completed.
JA: How about size of deals? Are you seeing small-caps back in the public offering market?
PB: At our firm, and particularly in technology, the size of companies we deal with is quite broad. For example, we recently closed a sell-side advisory deal for under $20 million, and are actively working on several deals over $200 million today. For us, deal size is not the primary motivational factor for new business, but is rather driven by our ability to add value to help a client achieve their goals. So, if we see an emerging technology that has potentially great demand, we will look to be involved regardless of the size of the company.
On the financing front, today we are primarily oriented toward working on financings for public companies, either IPOs or Follow-Ons. When it comes to M&A transactions we will seek to work with both private and public companies. At the moment, we are seeing venture capital at an unfavorable inflection point these days, and we’re not looking at VC deals as a result.
JA: What’s hot in terms of tech sectors? What can we expect to see industrywide in terms of new issues?
PB: Many companies across the technology and media landscape today are positioning their solutions as SaaS (Software as a Service) or a Cloud-based solution – for the obvious reasons pertaining to valuation. So I would say those are two of the hottest sectors. There are so many companies claiming to be SaaS or Cloud-based that it is creating some confusion, as a matter of fact.
Broadly speaking in software land, perpetual software licensing business is being transitioned to term-based licensing. Companies with traditional software licensing strategies are in the midst of trying to convert these perpetual relationships to hosted and recurring-revenue models. So we are seeing, for instance, a business that might have been 65% perpetual licenses, 20% maintenance, and 15% term licenses actively converting or sunsetting these perpetual licenses to either term licensing or recurring, seat-based licensing.. As the value proposition goes, it is more cost-efficient on the client to pay for what they are using.
JA: What other sectors are you seeing more of?
PB: Another emerging area that we are quite excited about is where e-commerce and technology intersect, and the emergence of next-generation e-commerce platforms, many of which are SaaS-based.
To give you a case study for the growing need for these eCommerce platforms, let me run through a brief example. Ten years ago, if you were a company such as Best Buy, as a traditional retailer also seeking to sell goods online with the growth of the Internet. With the rapid growth in web-based business opportunity, an entire department was created to focus on your web presence, from website creation to product description, pricing, and IT/server management. Today, much of these eCommerce initiatives are being contracted to a third-party provider due to the increased complexity with so many new customer interaction ‘channels’ being used, which is broadly referred to as Omni-Channel.
A few examples of leading brands that have outsourced their eCommerce solutions include UnderArmour and Crocs.
In pre-Internet days, maybe you would have received a catalog from someone like Best Buy, for instance. You would flip through it and then call in your order on the telephone. Today, with the rise of these Omni-Channels, you may still get that catalog, or you may get it digitally. But if you get the catalog you throw it in your briefcase and look at it on the train or bus while you are going to work. You use your smartphone or tablet or Kindle and have a look at the items you are interested in. You get to the office, go on your desktop and have a look at the website to see a bigger image. You scroll down and look at the reviews. Maybe on your way home you actually stop by a Best Buy store to look at the laptop or television that caught your eye, but then you go on home. They maybe you make the actual purchase on the desktop at home. So you had a catalog or a digital catalog, a smartphone platform, a visit to the store, a visit to the website from a desktop, and a purchase made from a different desktop at home. All of these consumer touch points have to be tracked and managed seamlessly; order execution has to be flawless, and the branding has to be identical across all platforms. The retailer, in my example, Best Buy, is now collecting information about your various visits to understand what is attracting you about the product, what you like. Typically they do not have all that expertise in-house and have no intention of building an inside empire to address it.
Another area we are focused on is within the marketing & advertising space, and also where this content meets technology platforms. Whether it’s the growth of video-based advertising over traditional display, or the emerging channels of mobile and social, we expect to see this ecosystem to be fertile ground for both new equity issuance and M&A activity for several years to come.
JA: Are retail investors back in the market, or are all these deals institutional?
PB: From our perspective, the retail investor is very much back in the market. Janney has completed 23 public equity offerings so far this year, and retail participation from our platform has been significant across the board. We find that the retail investor has gotten much more active on IPOs and follow-on offerings than for several years past. For quite a while now, the retail investor has focused on yield – dividends, interest, and other forms of income. What we’re seeing this year is retail beginning to be more open to risk by way of more traditional equity, and pursuing capital appreciation over traditional yield.
Retail investors have traditionally been more interested in large caps, but we are seeing them reach into the mid-caps now as well. We have more than 95 retail offices at Janney, and 10 institutional offices, so we are clearly weighted toward serving the retail constituency by those numbers.
JA: What are a couple of the deals that the tech group at Janney has participated in recently?
PB: Over the past year, we worked with Angie’s List (ANGI) on their IPO and follow-on offering, CaféPress on their IPO, and on a secondary offering for WNS Holdings (WNS), which is a business outsourcing company. We also recently worked on the acquisition by Lexmark (LXK) of Twistage, a unique cloud-based media management platform, and expect to continue to be active in M&A through the balance of the year.
JA: Is Janney likely to stay regional or will it follow some of the other middle-market banks and go national or international?
PB: Founded in Philadelphia in 1832, I would say it is a safe assumption that Janney is and always will be a mid-Atlantic firm. We have offices in most major metropolitan areas of the United States, but our strongest coverage in terms of sales and trading is geographically centered in the mid-Atlantic. I am in San Francisco with a part of the technology team, and Janney has had both sales & trading and equity research here for a while but we only added investment banking here in mid 2012 – I was in Philadelphia before that.
Janney’s capital markets presence has seen significant growth over the last few years, across our sales & trading, research and investment banking divisions. Today, we are not seeing many new investment banks being formed. There are some boutiques out there who are working on specialized deals, mostly in M&A. The consolidation of Wall Street as a whole after 2007-2008 has been an opportunity for us to pick up key talent as people have been displaced from other banks. So in many respects, the last few years have been a time of opportunity for Janney.
JA: Thanks, Peter.