Pru rocked as high-tech acquisition’s pros take a hike

Volpe Brown Whelan & Co. needed more capital to compete for high-profile underwriting assignments. New York-based Prudential – a unit of Prudential Insurance Co. of America in Newark, N.J., – desperately needed Volpe’s new-economy clients to remain a force in an investment banking business that has become increasingly tech-focused.

But marriages aren’t made on paper. Since the deal was announced in early December, six of Volpe’s top equity analysts and two star investment bankers have left. The defections have cost San Francisco-based Volpe, now known as the Prudential Volpe Technology Group, at least two investment banking assignments, and tarnished its reputation among notoriously fickle Silicon Valley clients.

“When you buy that kind of an institution, the key assets are the people, and it looks like a lot of those assets are leaving,” says Frederick Ruegsegger, chief financial officer of Neoforma.com, a health care e-commerce company.

The departures underscore the inherent risks of acquiring any investment bank, particularly one with employees in high demand. Volpe’s professionals, most of whom specialize in electronic commerce, Internet software and telecommunications companies, were pursued by recruiters the moment that word of the Prudential deal leaked out.

“Volpe’s a small firm, and some guys just don’t want to work for a large organization,” says Brian Sullivan, managing partner of the financial services practice at headhunter Heidrick & Struggles in New York.

Prudential officials say they will weather the departures and find able replacements. “I think we’ve got something very attractive to offer people,” says Paul Scura, the firm’s head of investment banking.

Still, even he acknowledges that the turmoil has damaged Prudential’s goal of competing head-on with the likes of Bear Stearns, Donaldson Lufkin & Jenrette and other investment banks that serve middle-market technology companies.

“The losses on the research side,” he says, “were deeper than we anticipated.”

Until last year, Prudential was an investment bank on the rise, gaining market share in sectors from selling initial public offerings to underwriting asset-backed bonds. In IPO underwriting, an important business for a firm with 6,000 retail stockbrokers, Prudential quadrupled its deal volume between 1996 and 1998, rising to sixth from 20th among Wall Street firms, according to Thomson Financial Securities Data.

The Internet frenzy proved to be Prudential’s undoing. Though three of Wall Street’s top Internet analysts — Merrill Lynch’s Henry Blodget, DLJ’s Jamie Kiggen and SG Cowen’s Scott Reamer — got their start at Prudential, technology banking has never been its strong suit.

With 72% of the money raised in IPOs last year going to high-tech companies, Prudential fell to 16th from sixth in IPOs.

“Our strengths have been in the areas of financial services, real estate and the consumer products, and last year no one cared about those areas from an investment standpoint,” says Mr. Scura.

$2 million goes a-glimmering

The Volpe acquisition was supposed to solve this problem, but the San Francisco house’s clients aren’t cooperating. Earlier this month, Neoforma and broadband technology provider Efficient Networks both removed Volpe as a co-manager on upcoming equity offerings. Losing those deals will cost Volpe about $2 million in fees and commissions.

“Choices of investment banks are driven heavily by analysts,” says Neoforma’s Mr. Ruegsegger. “So when Volpe failed to retain the analysts who were going to cover us, we just felt that having Volpe as a co-manager was no longer in the company’s best interest.”

Volpe lost not only the two analysts it had assigned to cover Neoforma, but the investment banker on the deal as well: Internet analyst Charles Finnie left for CMGI@Ventures; health care analyst Edward Keaney quit for rival investment bank W.R. Hambrecht; and banker Theodore Ridgway joined Credit Suisse First Boston.

One of the eight defectors says he was disturbed by Prudential’s decision to lay off most of Volpe’s sales and trading staff. “If the firm had been left as a more autonomous unit, there would have been fewer defections,” he says.

Some turnover was inevitable. Wall Street issues bonus checks in January, which makes it when analysts, bankers and traders are most likely to switch jobs. The turnover at Volpe is not unlike what happened at Robertson Stephens when it was sold twice within a span of two years. Robertson eventually recovered, ending last year as the nation’s eighth-ranked IPO underwriter.

Volpe still has its most important asset — its founder Thomas Volpe, who is considered an ace dealmaker with top-notch contacts in the high-tech world. “Tom Volpe is a very savvy guy, and Prudential should do fine as long as he’s there,” says Tracy Lefteroff, a partner with PricewaterhouseCoopers’ San Jose office.

The terms of the deal give Tom Volpe a strong financial incentive to drum up business, Mr. Scura notes.

Prudential can afford to be patient. Even before it bought Volpe Brown, Prudential had already established a banking group for Manhattan’s Silicon Alley led by Charles Millard, former head of the New York City Economic Development Corp. Mr. Millard, who arrived in May, has yet to secure any lead underwriter jobs, though he did help win a co-manager slot on Alta Vista Co.’s upcoming IPO and says other deals are in the pipeline.

“Charlie is doing exactly what we thought he’d be doing for us,” Mr. Scura says, “which is using his relationships in the Alley to identify opportunities.”

Furthermore, even if it takes Volpe a little while to get back on track, Prudential can find comfort in the fact that it got Volpe at a bargain price. It paid approximately $170 million for the firm, Volpe insiders say, not the $250 million to $300 million cited in some news reports.

If the insiders are correct, that means Volpe’s sale price was a dirt-cheap 1.5 times 1999 revenues — significantly less than the 2 times revenues Chase Manhattan paid for Hambrecht & Quist, one of Volpe’s Silicon Valley rivals.

“Prudential (Insurance) has $13 billion in capital,” observes Alfred Capra, an insurance analyst with Keefe Bruyette & Woods. “For them, $170 million is a drop in the bucket.”