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DONE DEALS - Small Fish, Big Bait

As the recent IPO of Compellent Technologies shows, size and brand name can sometimes be everything.

WHEN MINNEAPOLIS-BASED data storage company Compellent Technologies decided earlier this year to go public, its top executives had to handle an onslaught of investment bankers, all arguing that their firms were uniquely suited to lead the transaction. Among the many supplicants were technology-focused boutique firms that often lead IPOs from the sector, including Needham & Co., Piper Jaffray and Thomas Weisel Partners. But when decision time arrived, Compellent chose Morgan Stanley as the deal’s sole book runner, underscoring the power of brand name and scale in the highly competitive investment banking business and undermining a recent trend toward joint book runners. The $93 million offering came to market in October.

Clients have increasingly turned to multiple banks to lead their deals in recent years. By doing so, they ingratiate themselves with firms that might not have been their first choice for today’s deal but might be needed for future transactions or have proved helpful in the past. Often one of the book runners is the true leader of the transaction, with the others simply earning credit for the league tables that rank top underwriters according to the volume of deals they’ve managed. Philip Soran, Compellent’s CEO, balked at that idea.

“There’s a trend to do more joint book runners, but if you look at it logically, there’s no reason to do that,” he tells Institutional Investor. “You want to know who leads the charge and who runs the road show. Having joint book runners just creates confusion.” Compellent chose Needham, Piper Jaffray, Weisel Partners and RBC Capital Markets for lesser roles as co-managers, “for additional research coverage and an extra set of eyes overseeing the whole process,” he explains.

Noticeably absent from the deal was Wall Street’s most elite firm: Goldman, Sachs & Co., the leading IPO underwriter globally. A source close to Compellent says Goldman wanted the mandate, but the issuer turned the bank down because it was preparing the IPO of 3Par, a competitor. That sale, raising $105 million, took place on November 16. Companies don’t like their banks simultaneously working on a competitor’s transaction because it gives one intermediary access to sensitive information about both businesses, creating a potential conflict of interest. Goldman declines to comment.

Brand played a big part in Compellent’s decision. Morgan Stanley’s global presence and distribution set the firm apart, especially from the tech-focused boutiques competing for the mandate. On the road show Morgan Stanley introduced the company to the world’s biggest and most influential investors. Soran and his management team did 69 investor presentations over 12 days, covering major U.S. financial centers as well as Frankfurt, London and Milan. They were accompanied at every step by a Morgan Stanley associate, who Compellent CFO Jack Judd affectionately referred to as their “sherpa.” The executives were impressed by how well their handlers kept them on schedule, sometimes physically pulling them out of meetings that ran long. Says Judd, “There’s 20 to 25 funds you just absolutely want to be in front of in an IPO, and I think Morgan Stanley got us in front of every single one of them.”

The offering priced at $13.50 per share on October 9. Soran doubts the boutiques could have run the process as smoothly. “It’d be tough to imagine them doing it as well as Morgan: part of it’s resources, part of it’s cachet, part is access and part is — frankly — Morgan does this all the time.”

Compellent’s shares have taken a wild ride in the aftermarket. After surging 79 percent, to $24.19, on its first trading day, the stock fell sharply over the next several weeks, hitting a low of $12.31 on November 12 before rebounding to $13.25 in late November.

“The equity and credit markets have experienced significant volatility in recent weeks, which has impacted the performance of tech stocks,” says Edward Liu, one of the Morgan Stanley bankers who worked on the deal.

Rough trading or not, Soran believes the company did the right thing by going with a brand-name underwriter over a more focused boutique. “Morgan Stanley and Goldman Sachs are two great names, and if you can get one of those two, that’s a big deal to have them lead your IPO,” he says.