Lawrence Calcano, Managing Director, Goldman Sachs

<![CDATA[Calcano is co-head of the technology practice at Goldman….
Powerpoint failure. There is a debate going on about skipping the presentation. Hey, there it is.
Calcano starts with an apocryphal story about a Snapple cap that informed him the average person swallows 12 spiders while sleeping during their lifetime. He wonders who thought to measure that. I wonder if he believes everything he reads.
Based on the fund flows into the markets, the current rally seems sustainable to Calcano. NASDAQ up 53 percent since March. Goldman's Tech Index is up 58 percent. There are more deals brewing and more business creation (I suspect they only pay attention to business creation that requires $10 million or more — in other words, aberrant behavior).
What held the market down in 2002 was a "nuclear winter" caused by the bubble's burst, the real appearance of economic weakness, scandals galore and research analyst conflicts, the weak dollar and so on. It was a "perfect storm" (the allusions are flying) and now CEO confidence is rising, GDP is growing, etc. As a result, valuations are starting to increase and we have to wonder how much further the valuations of tech leaders can go.
Equity issues are at their lowest point since 1993, and only 16 percent is coming through IPOs. Calcano says that the IPO market will be more robust in 2004. "Investors are ready to buy IPOs, the market is open. One of the issues is the maturity of the companies" — an IPO company has to be profitable. So, what does it take to go public? A proven business model, real and large markets, long customer lists and proven experience, profitability, defensible technology and barriers to competition, expanding gross margins and operating margins and a solid management team.
The IT business has been able to tap the high yield market recently, which is new. The companies able to do so are mostly hardware firms with real assets.
The new research rules are just firming up — banking and research is completely separated. This contradicts Tom Weisel’s comments yesterday, reflecting the lack of clarity about this in the financial service industry. This makes it difficult for companies contemplating an IPO — they can’t meet with research and ibankers at the same time and research is–supposedly–totally independent. There’s a very mixed message here, a little plaintive.
Calcano expects the M&A market to revive in 2004, but the valuations are more down to Earth and reflect a new acceptance of reality. The typical revenue multiple is 1.6 times revenue and 36 times profitability. In 2003, mergers have accounted for about four percent of market capitalization of the total market, compared to between 12 and 15 percent in the late 90s.
The volatility of the NASDAQ has fallen dramatically — from 44 days in the previous quarter where values moved by two percent to 14 in the current quarter.
He finishes the presentation with a cautionary note about the unexpected. We need to be “flexible and balanced.” In other words, it’s still a very tentative recovery.
Alex Vieux and Mark Mowry of Red Herring come on to question Calcano.
Mowry: People have been taking potshots at ibanks — how are you going to change that cynicism?
Calcano: We drive investment banking based on the notion of “long term greedy” so that we have no deals that depend on just the next quarter. It is really easy to throw potshots, but I view my job to be a trusted advisor to the client.
Mowry: What sectors are you looking at?
Calcano: There are a lot of middle-sized software companies that need to get larger. Merging software companies is hard. Telecom equipment is another interesting area. We’re seeing a lot of companies with solid business models coming out of the downturn.
It takes strategic decisions to be in the right place at the right time. In the 90s we had many people focused very narrowly — a person dedicated to eCRM, for example. Now, Goldman has to be focused on larger companies — they did the HP-Compaq deal, for example. That strategy has paid dividends, and now we need to change again, because the IPO market is coming back.
While the IPO market is open, there will only be a small number of IPOs in 2004. More than this year, but it’s not going to be 400 or 300 IPOs. The companies are not there yet. Companies should not rush to go public. Being public is hard. It’s really expensive to be public. Sarbanes-Oxley makes it a real challenge.
Mowry: How do you make up for the lack of influence because of the reduced analyst coverage?
Calcano: The criteria companies use to select bankers are changing. Research is still a factor, but we’ve been asked in recent months to work on deals for companies we don’t even cover. In the future, research will be much more focused on secondary investing than investment banking.
Vieux: Is Goldman focusing on the U.S. or will Goldman redeploy to address Europe and Asia.
Calcano: We cover the big cap companies around the world and I’ll put our coverage up against anyone’s. He’s saying, essentially, that they are ignoring the startup world outside the U.S. and even in the U.S. they pay attention only to companies with very large capital needs. This is good news for the boutiques out there, though they shouldn’t hope to be acquired by Goldman at the old valuations — big banks will not make that mistake, overpaying, again.
He goes on to say they helped to cofound Shingwa University in China, an entrepreneurial training center. But, he says that China will take a very long time, point to the old bugaboo, piracy, to discount the China market a bit. He’s really saying that Goldman will deal with big companies.]]>