Frank Quattrone’s Free Advice For IPO Or M&A Candidates: Do The Leg Work

If you’re the founder of a startup contemplating an initial public offering or considering an M&A exit, Frank Quattrone has advice for you.

Quattrone, of course, makes a living doling out words of financial wisdom at his two-year old investment bank, Qatalyst Partners. This week he dispensed the goods for free, fortified by his recent success sparking a bidding war between Hewlett-Packard and Dell for cloud storage company 3PAR.

M&A candidates need to know their buyers, and approach them long before acquisitions become the focus of the conversation, he said at the Web 2.0 Summit in San Francisco. 3PAR, for instance, was in OEM discussions with both HP and Dell before the bidding began.

Companies also need to know where they stand in a market. Are there six potential suitors and two potential target companies, or the reverse? “You certainly don’t want to end up without a chair,” he said.

The M&A market is a changed place, he noted. The top 10 tech companies have 70% of the market capitalization and 70% of the cash. Buyers are fewer.

At the same time, markets are blurring. Cisco Systems is no longer the sole obvious buyer of a networking technology. It might also interest Oracle, IBM, HP or Dell, Quattrone said. On the IPO front, “we need to reinvent the IPO market for current conditions,” and as a result startups need to be rethink their strategies, he says.

Only on rare occasions will a company need more than one book runner or more than a half dozen investment banks participating in a deal, which is in contrast to the time when multiple book runners got into a deal and an issue became spread too thin.

Companies also need to seek out shareholders willing to understand their businesses rather than relying on Wall Street to be the conduit, he says.

IPOs, he says, aren’t what they used to be. Traditionally, they accounted for 50% of venture capital liquidity. Over the past 10 years, they have fallen to 10% or less. “The IPO isn’t the same predictable resource it once was,” he said.

Several reasons explain the change. For one, fewer investment bankers are willing to work with smaller companies. At the same time, big, consolidated investment banks aren’t as excited by small technology company deals. They do little for the balance sheet.

Regulatory friction also remains considerable even as public market investors set a higher bar for companies and expected larger more accomplished businesses to make the move to an IPO.

In a changing world, new strategies are needed. Quattrone appears to have given this a good bit of thought.