H&Q; Poised for Upswing in High Tech
It couldn’t have been an easy performance for William R. Hambrecht, the soft-spoken Princeton man whose investment banking and venture capital firm, Hambrecht & Quist, was the toast of Wall Street for its initial public offerings in 1980 of Apple Computer, Genentech and People Express.
Speaking to more than 1,000 money managers last week at the firm’s 14th annual technology conference, Hambrecht talked of the “overstimulation of entrepreneurial activity” in the heady years that followed the personal computer and biotech revolutions. He spoke of “a breakdown in discipline” at his own firm, a breakdown that allowed companies with slim prospects for success to go public.
That said, he reiterated the message that he’s been delivering since he and the late George Quist founded the firm in 1968: “The fundamentals that have driven the technology revolution are still with us. New markets will continue to expand as computing gets cheaper and cheaper.”
Selective Comeback
It is a message that many of the money managers were prepared to listen to. In recent months, the technology market has staged a quiet--albeit selective--comeback. The H&Q; technology index is approaching 700, having bottomed out at 427 after touching 1,040 before the technology sector’s fallout in 1983.
With that comeback has come a renewed sense of confidence at Hambrecht & Quist. Like many of the firms it underwrote, H&Q; stumbled when it was challenged by new competitors and confronted with a cyclical downturn. But, while many doubt that H&Q; will ever regain the great cachet it had in the early 1980s, most Wall Streeters expect the firm to be a tough competitor for the rest of the decade.
The new mood at H&Q; comes despite continuing instability in its top management ranks. Last month, Thomas S. Volpe resigned suddenly as chief executive after repeated clashes with Hambrecht.
Volpe, who was unavailable for comment, was reported by associates to be considering starting his own investment firm.
His departure came on the heels of chronic turnover in the important position of director of research, which has been held by no fewer than five individuals in the past three years.
“We’ve been through a very tough cycle, and we’re stronger for it,” Hambrecht says. “We were living in a world that went down 60%”--the drop in H&Q;’s technology index of 175 high-tech companies--”and we really had nothing else to fall back on. That puts a lot of strain on people.”
Adding to the strain was Quist’s death in 1982. Quist was the consummate “Mr. Inside,” handling the nuts and bolts of the firm while Hambrecht dealt with clients and the outside world.
“Maybe we’ve all underestimated the extent to which George was the glue holding that firm together,” says the head of a rival technology-oriented investment bank.
Hambrecht brought Volpe in from White Weld & Co., in part to fill the vacuum left by Quist’s death. But H&Q; officials say Volpe’s hierarchical management style clashed with the collegial style fostered by the firm’s founders.
Volpe, it is said, was also frustrated by Hambrecht’s reluctance to fire people and his refusal to consider the possibility of selling the firm.
“We tried for months to work out some way in which we could coexist here. But he grew not to like the job,” Hambrecht says.
Visions Differed
Volpe’s vision of the firm also differed from Hambrecht’s.
Officials say the departed chief executive pushed to shut down or drastically scale back H&Q; offices in New York, Los Angeles, Menlo Park, Calif., and London, which are used largely as marketing beachheads. “He saw us as a one-office firm tightly focused on corporate finance,” Hambrecht says.
With Volpe gone, “we’re trying to rebuild the spirit of partnership that we had before,” Hambrecht says. “An atmosphere of controlled chaos can attract a lot of entrepreneurial people. Only time will tell, but I think that in the long run, going back to a collegial atmosphere will promote stability.”
Certainly, Volpe’s sudden departure seemed of little importance to the more than 1,000 money managers who gathered in San Francisco last week for H&Q;’s 14th annual technology conference.
“I feel a lot better about H&Q; today, compared to a year ago,” said Joseph McNay of Essex Management in Boston. “The firm has shown a lot of restraint in its underwriting. They have shown much better judgment than some of their competitors, refusing to do some deals that others have done.”
Still, many on Wall Street feel that H&Q; has been losing ground in picking winners--and in landing prestigious business--to such competitors as Alex. Brown & Sons of Baltimore; L. F. Rothschild, Unterberg, Towbin of New York, and Robertson, Colman & Stephens of San Francisco.
(H&Q; and those three firms are known collectively on Wall Street as “The Four Horsemen.”)
“Where was H&Q; on Microsoft?” asks one competing investment banker. “In 1980, or even the last hot new-issues market in 1983, Hambrecht would have been in there.”
Microsoft, a well-regarded software house that makes the operating system for IBM PCs, was brought public by Goldman, Sachs & Co. and Alex. Brown & Sons and quickly jumped to a big premium.
“The hot hand rotates,” shrugs Hambrecht in response to the criticism. “Alex. Brown is currently perceived as the leader of the four horsemen, but they have a much broader business base than we do. We’re mainly technology. They do technology, restaurants, small banks and S&Ls.;”
Hambrecht seems confident that H&Q; will do well in the next round of high-tech initial offerings. The firm has about 275 investments in its venture capital portfolios with a combined value of about $700 million.
Of those, Hambrecht says, 28 companies will be “ready to go public in the next two or three years, and that number may be low.”
But he says the new technology offerings will feature products and services that are “evolutionary rather than revolutionary.”
That is in marked contrast to 1980, when H&Q; brought public three revolutionary pioneers in their respective industries: Apple in personal computers, Genentech in genetic engineering and People Express, the prototype no-frills airline.
Raised $512 Million So Far
So far this year, H&Q; has raised $512 million in public financings, including four initial offerings. The total for all of last year was just $645 million. In 1983, its peak year, the firm raised $2.2 billion.
Echoing Hambrecht’s theme is William Welty, H&Q;’s director of research since October. “A new area of entrepreneurial ferment is opening up,” he says. “It’s not as revolutionary as the personal computer or genetic engineering, it’s not as tidy a business, but it can be equally rewarding to investors. It involves the application of computer technology to an otherwise prosaic business.”
“It’s a phenomenon that’s going on in a hundred different industries,” Welty continues, citing as investment picks such companies as TSO Financial--a direct marketer of financial services that uses computer technology to locate and screen potential customers--and Certified Collateral Corp., which provides electronic databases for used-car valuation to the auto insurance industry.
The biggest buzzwords at H&Q;’s technology conference last week were telecommunications and systems integration.
“There’s going to be a lot of money made getting all the computers that are out there to talk to one another,” Welty says. His picks in this area include SHL Systemhouse, which provides systems integration services to large government and corporate clients, and Systematics, a software and services concern.
“I think there is a substantial cyclical play in technology stocks,” Welty says, adding that he believes investors should act now.
As evidence, he points to Hambrecht’s “selected stock list” of 35 companies, which has gained 25% so far this year, compared to a 15% gain for the Dow Jones industrial average and a 13% increase in the Standard & Poor’s 400.
High-Speed Juggling Act
H&Q; even has a place for some of the companies it sponsors that don’t quite work out. It is known as the the firm’s “workout” department, and it has even spawned a venture capital fund dedicated solely to turnarounds.
Presiding over the workout area is H&Q;’s flinty chairman, Q. T. Wiles, who operates out of what he calls “the chairman’s office” in Sherman Oaks. It is an appropriate name for the office; in addition to his duties at H&Q;, Wiles is chairman of five publicly held companies and two private ones.
Wiles learned his high-speed juggling act as a top executive at TRW, where he simultaneously managed 15 divisions. He works with a team of turnaround specialists, moving them from one company to another as business conditions dictate.
After Granger Associates, a microwave products concern, was rehabilitated and sold last year, Wiles moved its president, Daniel Rasdal, to another sinking company, Silicon General.
To emphasize the magnitude of Rasdal’s challenge, Wiles handed Rasdal a bailing bucket at the time of his appointment. “That’s classic Q. T.,” a Wiles associate says.
The workout business has proven profitable for H&Q.; “We make money on a company from cradle to grave,” Wiles once quipped.
A good example is Miniscribe Corp., a disk-drive manufacturer that was on the verge of collapse last year before receiving a $20-million capital infusion and a new management team headed by Wiles.
After posting losses in late 1984 and early 1985, Miniscribe has reported three consecutive quarterly profits. The stock has climbed from $1.45 a share to its current value of about $7.50.
