When IPOs give way to M&A, investment banking can get nasty. Which is fine with George Boutros. He's been nasty all along.
In the world of tech-industry investment banking, the last few years have seen some heady times. As IPO madness ripped through the public markets, it raised the profile of raising capital to a pseudo sporting event. In the process, the latest gilded age made celebrities of high-profile bankers like Credit Suisse First Boston's Frank Quattrone - who has many significant IPOs to his credit, including Amazon.com - and Mary Meeker, an analyst with Morgan Stanley who excelled at communicating the visions of fledgling Internet companies, if not, ultimately, predicting the direction of their stock prices.
For investment bankers more than anyone else - save, perhaps, daytraders - an abundance of IPOs means good times. There's no lockup on a banker's fortunes as there is for entrepreneurs or even the VCs behind a deal. For each IPO, a client typically pays 7 percent of the amount raised to a syndicate of underwriters on the day of the event, with about half going to the lead underwriter. Also, the lead usually gets the opportunity to provide numerous other services, like secondary stock offerings. For a bank, one IPO in a hot market can keep money coming in for years.
Of course, good times never last, and - as evidenced by the sharp drop in new issues since last March - the bigger the party, the more painful the hangover. Except, that is, for the banks. Far from sitting around waiting for the next IPO rush, bankers set out in search of a new party. Generally, it can be found at the other end of the business: mergers and acquisitions. An IPO fall-off sends companies scrambling for alternative funding or ways to cut costs. The easiest out is often a merger, and so, during times like these, more companies inevitably find themselves on the block. And though the banker's seven-figure cut of an IPO is nice, it has nothing on what comes from shepherding a good-size merger: One $4 billion deal could net a bank as much as $40 million or more.
Not every successful IPO bank makes hay in M&A. IPOs are about timing, storytelling, and relationships; mergers involve dealmaking, manipulation, and - oftentimes - some serious mindfucking. Just as clearly, not all successful M&A banks will flourish in the latest turn. For the first time in history, tech is driving the economy as we head out of a robust IPO period; for once, the East Coast operators will not necessarily rule. What's more, as the market continues to spiral, it's possible that one of the by-products of IPO madness, an abundance of equity - which has driven deals to previously unthinkable pricing levels - could begin to lose favor. In such a world, not only does every deal become harder to pull off, but competition among banks becomes far less gentlemanly. A perfect environment, in other words, for George Boutros.
Credit Suisse First Boston's global head of technology M&A isn't well known outside tech circles, but the 40-year-old Boutros is famous in the Valley - mostly for his willingness to do whatever it takes to close a deal. Over the past five years, he's developed a reputation for securing staggeringly high offers (like the $24 billion deal he negotiated in the sale of Ascend to Lucent), talking down the price on companies when he's doing the buying, and just generally knowing how to get the other guy to blink. His Palo Alto-based team has been responsible for several major transactions recently, including the sale of Xros to Nortel Networks for $3.3 billion, Aspect Development to i2 Technologies for $9.3 billion, and Silicon Valley Group to ASM Lithography for $1.5 billion. His group has also been buying aggressively, snapping up Software.com for Phone.com, Alteon WebSystems for Nortel, and Newbridge Networks for Alcatel. For someone like Boutros, this kind of activity can be quite profitable: His personal takeaway on any given deal generally works out to be in the seven figures.
Those who have been across the table from the man say he has a distinct style: In a community far more comfortable with coopetition than cutthroat attacks, Boutros intimidates adversaries by yelling at and belittling them. "George is emotional in a very Cartesian world," says David Roux, a former Oracle senior executive turned dealmaker for Silver Lake Partners, a tech-oriented leveraged-buyout firm in Menlo Park. "He gets upset. He sulks. He's indignant. All this in a world of dry engineers."
Others put it more bluntly. "He practices some of the most unorthodox, 1980s-style, briefcase-slamming tactics in the industry," says a former CSFB investment banker. "He doesn't want just to win. He wants to win and make you look stupid. He roughs up the executives from the other side so badly that they want him on their side next time."
Boutros isn't shy about describing his rise from outpost generalist for Morgan Stanley to tech-world rainmaker. It has come on the back of obsession and 18-hour days. "I tend to be a deal junkie," he says over breakfast at Buck's, the VC hangout in Woodside, California. "If it's not really fast, I tend to" - his head sags - "collapse."
Frank Quattrone, his boss, couldn't be more admiring. "At the professional level, he is to M&A what Tiger Woods is to golf," gushes Quattrone. "He's got the whole game." Adds Andy Rachleff, a VC with Benchmark Capital who has retained Boutros on numerous communications-equipment deals: "He is almost always able to get a 10 percent higher price than anyone else and simultaneously increase the likelihood of getting the deal closed. I always want him representing me."
For anyone hoping Boutros would just go away - as many do - a merger that he had nothing to do with promises to make him even more powerful: CSFB recently bought Donaldson, Lufkin & Jenrette in a takeover worth $11 billion. If the two companies mesh, CSFB should be transformed from a perennial second-tier bank into a diverse firm with the stature of Morgan Stanley and Goldman Sachs, meaning that Boutros and his team will have even greater resources at their disposal at a time when the tech world is racing to consolidate. The way Boutros sees it, the deal can only bring him more action. "The M&A business is all about franchise and reputation," he says. "Once people trust you, you can be a bit more active on their behalf."
Until 20 years ago, M&A was a genteel business where the client came first. Well-mannered bankers who spoke their own lingo and were schooled in the technical calculus of dealmaking would methodically buy and sell companies according to the latest Wall Street whim. It was the ultimate high-touch affair. That changed in the 1980s, as corporate raiders made an art out of ruthlessly reconstituting American business. It was a controversial time, to say the least; bankers and corporate executives exploited securities law and corporate governance policies to reconstruct behemoths like RJR Nabisco. They called it "unlocking value," and pulled it off by using high-yield debt, called junk bonds, to fund takeovers in leveraged buyouts, or LBOs - in effect, leveraging companies against themselves.
While noninvestment-grade debt had been around for decades, in the '80s Drexel Burnham Lambert, under the leadership of Michael Milken, began trading junk bonds like stocks. (The term junk was first used because only trashy companies - those without access to low-interest loans - issued the high-yield bonds.) Working with huge amounts of junk - sometimes in the tens of billions' worth - acquisitors would procure a property and then do whatever was necessary to service the crushing debt. Usually that involved brutally restructuring or selling off pieces of the company. As a result, the buyers would become obscenely rich (because they owned the equity even though they had borrowed the capital), while their employees were often put out on the street. As much as it annoyed the business moralists, the era ended not because junk bonds were banned, but because Milken got caught in a web of insider-trading scandals. With its ringleader in jail - and an economic recession drying up demand - junk faded away. It came back, to a degree, in the mid-'90s, but in the new iteration, junk was one of many tools for raising capital rather than a blunt instrument for raiding corporations.
Then everything started to change. Soon, hundreds of publicly traded companies and thousands of startups with an itch to go public were calling Silicon Valley home, and Wall Street greeted them with open arms. The by-products were the high-flying IPO and another financial tool used to spur deals: equity. Every company had a seemingly endless supply, and as long as optimism ruled, equity-based mergers were unbeatable. The acquiring company would spend whatever it took, knowing it could always go back to the well; the acquiree would take equity in trade on the assumption that the deal would generate future revenue. In such an environment, everybody's happy because everybody wins.
Especially the banks, which get anywhere from half a percent to 2 percent of every transaction. That may sound like a small take - until you think about the size of the deals. When Boutros convinced Lucent to fork over almost $5 billion for gearmaker Chromatis Networks, the fees ran to $40 million. And it took just three weeks to negotiate. When the IPOs dry up, such fees become even more important to the banks. Late last year, CSFB watchers were estimating that the tech group was on pace to hit more than $1.5 billion in revenue for 2000 - at least half from merger-advisory fees.
The big money that comes with M&A, coupled with the skills necessary to pull off deals in a competitive environment, tends to favor a certain kind of negotiator: the ruthless type who likes to manipulate people. But finding someone who is good at tech M&A is not as easy as hooking up with someone with a penchant for being an asshole. Nor is it as easy as employing a generalist. Introducing the growth potential of a fledgling router company is more complex than diagramming the cost savings that come from consolidating HR departments. And things get even hairier when that router company has never manufactured a product.
Boutros' tech M&A team is a nearly all-male group fashioned by his swagger into nothing short of a frat-house mentality - complete with pledge names. The close to 70 global professionals, ranging in age from 22 to 43, have gotten headlines for their big deals. But the team's specialty is peddling emerging companies made up of little more than a collection of engineers. Before it became commonplace for Cisco to snap up prerevenue businesses for billions, Boutros hawked little operations like Sahara Networks to Cascade for $200-plus million, OnStream to 3Com for more than $250 million, and Packet Engines to Alcatel for upward of $300 million. "George built his legend selling startups with little or no revenue but huge potential," says David Britts, once a member of the Boutros team and now a venture capitalist with Chase Capital Partners in San Francisco. "He is the best at creating an auction environment."
For Boutros and his group, rule number one is to stay plugged in. "We're the intelligence flow," he says, "and we have access to the right companies. When Nortel wants to buy a company, I know all the players."
Whereas most mergers are stand-alone events, Boutros prides himself on parlaying one deal into another. It's the difference between being a broker and an instigator. In 1996, for example, data networking company OnStream came to Boutros in search of a buyer. Boutros approached 3Com and Cascade. While both were interested, 3Com won out. But that wasn't the end of the trail for Boutros. He now had valuable information: Cascade was looking. "The minute the OnStream deal was done, I called Sahara," he says. And so it went - within seven weeks, Boutros had sold OnStream to 3Com, and Sahara Networks to Cascade.
Even failure has an upside for Boutros. Acquisitions are always sticky; a smooth negotiation is no guarantee that two companies will mesh. The merger of networking leaders Wellfleet and Synoptics - renamed Bay Networks - never quite took, partly because of the geographical and philosophical divide between the two management teams. By helping Nortel buy Bay Networks in 1998, Boutros righted a soured arrangement. As a result, Boutros got a fee for putting together the original deal, and then, after it didn't jell, he got another for selling the combined entity to Nortel.
To his foot soldiers, whose pledge names range from Poppy to LuLu to Dickhead, Boutros leads by example. "We're all known for being very aggressive," says Ethan Topper, a senior Boutros lieutenant who focuses primarily on Internet-oriented deals. Topper praises his boss' ability to consider a deal from multiple perspectives.
His colorful character breeds legend - and his share of detractors. A pioneering Valley investment banker, who admires Boutros for his skills, recalls an instance three years ago when all the yelling and screaming killed a deal.
Asked to compare himself to Boutros, a Valley M&A specialist at one of the world's biggest investment banks, says it this way: "I'm not an arm-waving asshole who puts my own interests before my client's."
Clients tend to feel just fine about the antics, however. Over the last few years, Bill Kerr, the head of M&A for Nortel Networks, has sought to transform the once sleepy Canadian telecom-equipment maker into a voracious acquirer of outfits that produce optical-networking gear. If writing checks is the measure of success, Kerr has succeeded; Nortel has bought 21 companies worth $31 billion in the last three years. He's used Boutros on many of those deals, and has watched his adviser bully dozens of peers. In one negotiation, Kerr remembers Boutros getting really angry. The acquisition target was fed up - sick of being condescended to and refuted on all terms. Then, as tensions mounted, Boutros exploded. "'You know, I'm not here to be your friend,'" Kerr remembers Boutros yelling. "'I'm here to get the deal done for my client. Now let's get on with it.'"
Ultimately, Kerr keeps going back to Boutros for one reason: "He is a tough son of a bitch. Argumentative. Focused. Intense. He never rests until he gets the deal done."
As for the tech M&A group's relationship with CSFB corporate, it's pretty much hands-off. Hang around Boutros long enough, and you'll hear lots of talk about the team, but very little about the corporation. Quattrone and Boutros - both of whom, by 1998, had worked at three banks in three years - make it crystal clear that their tech group, and not the investment bank, is the franchise. It's the kind of me-first attitude that makes Boutros appear reckless. A lawyer who has often seen Boutros in action says there's a "physical or semiphysical" aspect to his tirades. "It's almost a Bobby Knight-type of intimidation thing."
Born into a prominent political family in Lebanon, Boutros thinks it's trite to suggest that he learned the art of the deal from the bazaars he knew growing up, but his style of negotiation definitely comes from outside Silicon Valley. In fact, the Valley doesn't seems to have rubbed off on Boutros at all. He has no special love for technology or gadgets. Unlike his East Coast colleagues, he rarely wears a tie and seldom a jacket, but he still looks more like a New York investment banker than a Valley engineer. Like many of his geeky clients, Boutros accumulated a great deal of wealth during the 1990s - he won't say how much, but it's easily $100 million - yet he wears it in a decidedly old-world way. For starters, there are the dark-hued dress slacks, monochromatic Façonnable shirts, and Audemars Piguet Swiss watch. Then the house - nowhere near the mansion sprawl of the Valley, Boutros lives instead in San Francisco's exclusive Sea Cliff neighborhood, where the views of the Golden Gate Bridge are stunning.
He studied at French schools in Beirut until the civil war broke out in 1975, at which time he and his sister decamped to secondary schools in France. His father, Fouad, was a longtime member of parliament and served in the early '80s as Lebanon's foreign minister. "Because of his situation, the situation, it was best for me not to stay there," says Boutros. He returned to Beirut for his final year of high school, and then attended what is now the American University of Paris to prepare for course work in the United States. When he studied civil engineering at UC Berkeley, he had in mind a career of construction in the Middle East - not computers and software in Silicon Valley. Far from being a programmer or constant emailer, Boutros doesn't even type well. His wife, Danielle, is practically a Luddite; she demands that their three children use computers as little as possible.
Boutros picked up an MBA at UCLA, "simply because that's what engineers did to make more money." Specializing in finance, he began to pay some attention to investment banking, especially to Drexel Burnham Lambert. He worked at Drexel in Paris for a summer, but as graduation approached he interviewed with the more established banks. A meeting with Goldman Sachs didn't go well: Boutros was told he had "too much personality." His personality would also be a problem at white-shoe firm Morgan Stanley, which he joined in 1986.
Still, Boutros developed a reputation for working complicated deals for staid clients like Dow Chemical and Holly Farms.
In 1992, he thought about joining Anthem Partners, a finance boutique in Los Angeles. Boutros' mentor at the time, Bruce Fiedorek, then head of Morgan Stanley's M&A, suggested that he establish a beachhead in San Francisco, supporting the West Coast business that then comprised clients like medical-supplies distributor McKesson, financial services giant Transamerica, and drugmaker Chiron - as well as Morgan's lonely Northern California outpost manned by Quattrone in the late '80s and early '90s. Although the deal flow was sparse, Quattrone was convinced that tech would take off. "Frank did $15 million in annual revenues then," Boutros recalls. "Nobody understood him. They didn't understand his small deals."
Boutros didn't exactly fill Quattrone's desperate search to find M&A professionals who knew tech, but the two grew on each other. "In the beginning, George was just a local version of the New York guys," Quattrone says. "He was a product guy whom you'd insert surgically into the deal and then remove." Boutros agrees: "Tech wasn't big enough to be all of what I was doing."
That changed in 1996 - just as the Internet was taking off as a financial phenomenon. Boutros, Quattrone, and Bill Brady, the head of corporate finance for the tech group, bolted Morgan to set up shop with Deutsche Bank, then known as Deutsche Morgan Grenfell. Quattrone's unit scored a coup when it handled Amazon's 1997 IPO, but the relationship with Deutsche Bank quickly soured as Quattrone wrangled with his German masters for control. In 1998, he attempted to quell rumors that his team would leave Deutsche by faxing a now-infamous "trust us" note, assuring clients that his group wasn't going anywhere. But within weeks, the troika had landed at Credit Suisse First Boston and promptly convinced their entire former team to follow them.
Aside from the embarrassment of having broken their word, Quattrone's people suffered not a bit; tech financing remained white-hot. In their new home, they quickly positioned themselves among the top financial advisers to the tech sector. But their firm-hopping sent a ripple through the industry, leaving former colleagues seething. Boutros mentor Fiedorek, for instance, now an éminence grise on the management committee at Morgan Stanley, was unavailable to say a word or two about Boutros, despite repeated requests.
While demonstrating his domesticity at his well-appointed home, Boutros talks of balance, of wanting to spend more time with his children. But in the same breath he turns back to where his mind always is: in the midst of a deal. His wife, Danielle, says she tries to plan events that will allow her husband to relax. But she acknowledges that he's never far from a telephone - late at night, early in the morning, and always during vacations.
Jason DiLullo, a CSFB semiconductor specialist, describes his boss as the "best M&A banker I've ever worked with." He remembers one weekend in which Boutros, away with his family at their Napa Valley retreat, spent hours on the phone coaching DiLullo through his first home purchase. "The only way to buy a home in San Francisco is with an all-cash bid," DiLullo recalls Boutros saying. Here, like nearly everyone who relates anecdotes about Boutros, DiLullo goes into a coarse imitation of his boss' accent, his polished and worldly - if idiomatically imperfect - English that carries the vestiges of Arabic and French, the other two languages Boutros speaks fluently.
Team member David Popowitz recalls that, when he was new in town, he received invitations to the Boutros home for Thanksgiving and Easter. Says Quattrone: "He's the sweetest, mildest guy around his kids. You wouldn't know this is the fiercest M&A negotiator in the world."
But according to near-universal opinion, Boutros is fierce. That's not unusual in a professional negotiator, of course. But he takes things to another, almost personal, level. Boutros' associates, aware that his reputation as a hard-ass has negative ramifications, try to downplay the oft-repeated line that he's a hothead. Boutros was too clever to lose his temper in front of me, although once, when I had the temerity to interrupt because he wasn't getting to his point quickly enough, I saw a flash of impatience. "I'm going to answer your question in a moment," he snapped. "But first let me finish what I want to say."
Most advisers pride themselves on their listening skills; Boutros likes to hear himself talk. "Sometimes it helps if he can be the shrill table pounder, and you can play the peacemaker," says Intuit chair Bill Campbell. "But once in a while you've got to calm him down and say, 'OK, I want to talk now.'"
One opponent compares a Boutros negotiation to a sumo wrestling match, with lots of grunting, posturing, and sprinkling of salt before the event. Says Stuart Francis, the top tech banker for Lehman Brothers, "You have to know how to deal with him, and you have to be mature about it. You just let him expend his energy and then you can have some rational discussion."
There are those who believe that being Boutros' client is no less dangerous. Because he's executed more deals than any of the people he works for, he's more likely to tell them what to do, not the other way around. "Sometimes he'll push back and say, 'You're fucking out of your mind,'" says Joe Costello, former CEO of Cadence Design Systems and board member of software maker Clarify when it retained Boutros for its sale to Nortel.
"He's like a tamed wild animal who could turn on its owner. He must be kept on a leash," adds a frequent observer. "And the leash must be spiked well into his neck."
Boutros, for his part, contends that he'll always do what the client wants, but he adds, "You have to be willing to tell your client what he doesn't want to hear."
The obvious question is whether Boutros, with all his histrionics, is just putting on a show. Quattrone and Boutros - and especially Danielle Boutros - suggest that there's a large element of drama to his hollering routine. But those on the receiving end don't buy it. "That's a crock of shit," says one periodic adversary. "George isn't acting. It's incredibly demeaning. He just thinks he's smarter than everyone else."
Those who have completed deals with Boutros, though, think anything that works is just fine. As one CEO said recently to another adviser, "George is a real asshole. But I'm glad he's my asshole."
One crucial mistake in the history of Boutros and Quattrone was their botched attempt to lure top tech research analysts Mary Meeker, Charles Phillips, and George Kelly away from Morgan Stanley. As it turns out, these three may never have lasted at CSFB. Here, unlike at most other banks, researchers seem to be second-class citizens. Similarly, in the advisory business under Boutros, CSFB has no need for the niceties so common to Silicon Valley M&A - backslapping and schmoozing.
It's precisely the kind of attitude that puts Boutros in direct opposition to some of the Valley's biggest companies. "When we buy a company, our belief is that it's not win/lose," says Mike Volpi, chief strategy officer and former M&A head at Cisco Systems. "I don't need a negotiator as much as a communicator. We tend to think of it as a marriage, not a trade. And so we think it's best to deal directly with us."
Volpi says there's a reason Boutros is so close to the VC community, which overwhelmingly sings his praises. He shares the investor's motivation: Close the deal and get the money. Cisco, on the other hand, must live with the consequences of a merger for years. If price is all that matters, "then the George Boutros mentality prevails."
Boutros scoffs in response, saying that Cisco favors dealing directly with principals as a way to keep the price down. "Cisco will say 'it makes us feel a little uncomfortable'" if a target contacts a banker. Small entrepreneurs, he contends, can be quite intimidated by a company like Cisco.
Ultimately, there's a simple reason that a Cisco doesn't use bankers and a company like Nortel does: Cisco is in Silicon Valley; Nortel is not. So Nortel needs someone at ground zero who knows all the players. Paradoxically, Boutros is useful precisely because he's so un-Silicon Valley. One source puts it this way: "The Valley is all about leaving some on the table. It's a friendly place where the technology wins, where it's important to be friends over the long haul. But the dirty little secret is that everybody wants to make the most money. George really filled a void that even the lawyers didn't fill because he'll play the person who makes deals happen and bear the brunt of the criticism for any hurt feelings."
"George doesn't have to be a relationship banker - he's got Frank for that," says Sandy Robertson, who founded Robertson Stephens and now helps run Francisco Partners.
As the market, M&A, and business in general become even less friendly, Boutros is more valuable. The bigger issue he faces is the one that vexes all M&A bankers these days: the drop in the value of equity - and the corresponding loss of optimism - that has come with Nasdaq's free fall.
Boutros has long been pessimistic about the direction of the market and has argued - often against his eternally optimistic colleague Bill Brady - that the sky-high multiples won't last. He says volatile times mean there will almost assuredly be more companies on the block, but a down market makes the merger dance far more difficult, because many clients think their own firms are undervalued. In the midst of the December CSFB tech conference in Scottsdale, Arizona - with tech stocks swooning - Boutros is juggling six deals, but the market's uncertainty makes it hard to know whether any of them will happen. "I told a guy today, 'I understand your stock is down 70 percent. But it's still very high.' I still see 40 percent downside on many technology companies," he says. "It's impossible. It takes a buyer and a seller to procure a company. Even with 100 sellers instead of 2, there still are no buyers. In a good environment, the six deals I have now would all get announced within two weeks. I may announce none of them."
Still, Boutros sees no real need to create some new financial instrument as a defense against tough times. He rejects the notion that equity will go the way of junk bonds. He thinks IT will continue to grow faster than the overall economy, and young tech companies - with no assets to borrow against - will continue to issue stock to raise money. As soon as the market stabilizes, even at much lower levels, there will be deals, most likely for greatly reduced fees. Boutros says that, in essence, companies have three options in a market downturn: "You sell for less money, or you sell for valuations that are much lower, or you fail. And there are all sorts of companies that should fail. We're back to the days of 18 months ago where a one-billion-dollar deal is a big fucking deal."
He's got enough money to just call it a day as things contract around him, but Boutros doesn't have any interest in retiring. Ever. When asked what he intends to do for kicks over the next 25 years or so, he suggests that being CEO of a company might interest him. He also mentions that the CSFB tech group may be setting up its own private-equity investment fund and implies he'd like to take an active role in its management.
Quattrone has other plans for Boutros. He might hand off the group to him at some point in the next few years. If not, he says Boutros could start his own M&A boutique, as onetime Morgan Stanley banker Eric Gleacher did. Quattrone knows the environment is swirling with rumors about whether the CFSB-DLJ merger will take; his public predictions act as reminders to the higher-ups at CSFB that if they lose sight of just how important the tech group is, George Boutros could walk away with the entire M&A franchise. Would the clients follow? Says Nortel's Kerr: "The whole team went over once, and we went with them. That should answer your question."
