Roth Capital Partners LLC has given up a big chunk of the investment bank to new partner Zions Bancorporation, but the proceeds could see the firm through what’s shaping up to be a down year for deals.
In February, Roth agreed to sell a 24.5% stake to Salt Lake City-based Zions for $16.5 million. The investment makes Zions Roth’s second-largest shareholder after Byron Roth, the firm’s chairman and chief executive.
For Zions, the deal helps the bank holding company keep up with rivals that have bought investment banks or moved into new services. Back in 1999, Zions tried but was unable to buy First Security Bancorp, which would have given it investment bank Van Kasper, now part of Wells Fargo & Co.
But the alliance could be even more significant for Roth, which does mergers and acquisitions, public offerings and other deals for technology and other companies valued at $150 million or less. Last year, the firm had to do more, smaller deals to keep on an even keel. Like other investment banks, Roth has seen the lucrative market for public offerings shrink.
“Last year was tough for investment banking,” Byron Roth said. “IPOs and follow-ons continue to be tough on a national basis.”
Back in 1999, Roth had a big year, doing 36 deals that raised $996 million. That was up from 23 deals worth $337 million in 1998.
But with the correction in technology stocks that started last spring, Roth has had to do more deals for less money raised. In 2000, the firm did a quarter more deals than in the prior year, though the money it raised dipped 5% to $948 million.
Roth also has seen a change in its deal mix. In 1999, most of the company’s money raised,$764 million, or 74%,came from public offerings, which can be the most profitable part of an investment bank’s business. Mergers and acquisitions and private transactions made up the rest.
Public offerings still took the lion’s share in 2000 at $407 million, or about 42% of Roth’s total raised. But that was down 46% from 1999. Combined, mergers and private deals made up the bulk of the firm’s money raised last year.
And this year could be worse. Compared with the first two months of 2000,when the market still was hot,Roth’s participation in public offerings is down 85%, Roth said.
The firm is looking to more merger and private deals this year to help get through the downturn in public offerings, according to Roth.
Patrick Allen, Roth’s new president and chief operating officer, said the firm plans to use the Zions investment for general corporate purposes. He and other Roth executives also pitched in another $2.5 million in new funding.
Roth said he sees the money and the alliance with Zions as a springboard to gaining market share during the current turmoil on Wall Street.
“Whenever you have markets that are unstable, opportunities are created,” he said. “We want to not stay the course, but to aggressively go after market share.”
The firm is looking to the Zions tie to expand in Salt Lake City, Seattle, Denver and other new markets, Roth said.
“They have a reach throughout the West,” he said.
The firm didn’t have enough capital of its own to mount an expansion after buying back shares in the firm, including a 20% stake once held by Santa Ana-based Fidelity National Financial Inc., Roth said.
One challenge will be in keeping key employees. That’s always been an issue for Roth, which is a small player in an industry dominated by big names. Steve Fillet, a former Roth principal, left in December for CIBC World Markets.
“You have to make sure you lock up the key personnel,” said David Winton, an analyst with New York-based Keefe, Bruyette and Woods Inc. “It assures you won’t have a mass exodus.”
The deal stands to expand Zions’ reach.
“We have not had the ability to offer our clients investment banking services,” said Clark Hinckley, a senior vice president with Zions. “It is something we have been thinking about for an extended period of time. If Zions customers needed investment banking services, the bank would refer them to another firm. Now Zions will be pushing those clients to Roth.”
Analyst Winton calls Zions and Roth a good fit.
Zions “is a middle market and small-business lender,” he said. “It is those kinds of companies that might evolve into a company that needs an investment bank.”
Zions has been on the prowl and made three bank buys last year, including its acquisition of Laguna Hills-based Eldorado Bancshares.n
