James Montgomery, CEO, Montgomery & Company

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

JAMES MONTGOMERY, CEO, MONTGOMERY & COMPANY, IS INTERVIEWED AT BLOOMBERG TV

JUNE 2, 2011

SPEAKERS: MICHAEL CRUMPTON, BLOOMBERG NEWS ANCHOR

JAMES MONTGOMERY, CEO, MONTGOMERY & COMPANY

14:31

MICHAEL CRUMPTON, BLOOMBERG NEWS ANCHOR: Well, while the beer and beverage industries have been hot with merger activity, my next guest says that there's an even hotter area M&A - IT and cyber security. He should know. He runs one of the best-known investment banks that caters to technology, healthcare and media.

Joining me from our San Francisco bureau for the third part of our series, "The Real Deal," is James Montgomery, the CEO and Founder of Montgomery & Company.

Mr. Montgomery, welcome to "Bottom Line." Thanks for coming on today.

JAMES MONTGOMERY, CEO, MONTGOMERY & COMPANY: Thank you, Mark.

CRUMPTON: Sir, you say that the IT security sector is the gift that keeps on giving for investment bankers. Why?

MONTGOMERY: Well, there's continued innovation by growth companies. And the threat keeps changing and the larger companies have to keep adding solutions to their product suite so they keep acquiring the growth companies.

CRUMPTON: Sir, if I might ask, then, because of the announcement that we were hearing this week out of Washington, that some of our lawmakers, some of the people in charge, are taking the cyber security threat seriously and perhaps saying that in the future, we should look at this as a threat to national security and proceed as necessary.

MONTGOMERY: Well, it's been a big issue for a while. I think it was sort of ignored. We've had advanced persistent threat from the Chinese, the North Koreans, the Russians, various countries - Iranians and now, the government's woken up and is very belligerent about the threat.

I think last weekend, the hacking of the RSA security and Lockheed discussing how they're under attack really woke up a number of the lawmakers in Washington.

CRUMPTON: Well, if we look at the history of the venture-backed M&A market this year, it looks like it's going to be a very good one. Do you expect it to be a record?

MONTGOMERY: It could be. Certainly, in the number of deals, between 2000 and 2007, there are about 450 venture-backed M&A deals a year. We're probably between 550 and 650 this year. So certainly be a record. It could go higher. It could be as much as 750 deals a year.

So absolutely, it's a very robust time as a number of reasons for that obviously.

CRUMPTON: What sectors of the venture-backed M&A landscape are the hottest right now and why?

MONTGOMERY: Well, first of all, you have a number of the large buyers who are cashed up. And they're in industries that are consolidating. And they will need to make acquisitions to broaden their product suites. And there's a number of sectors that have been completely dis-intermediated by a technology innovation.

So we see a software as a service as (ph) platform companies being very inquisitive as they have a model there to attract customers. And acquisitions can be very accretive to him. We see a lot of areas and acquisitions in the cyber security area as discussed.

We see the internet space returning with quite a few deal transactions there as well. Q1 kind of reflects those trends as well.

CRUMPTON: Mr. Montgomery, why are venture-backed companies now moving into a wave of consolidation? Is that a risky thing to do given the economy that we're in right now?

MONTGOMERY: Look, IT spending was very strong in the Q1. I think you really have kind of a two-tiered economy. Housing is tough. Some of the financial markets are tough. You know, manufacturing is starting to take hold. And technology spending - a number of the companies had record Q1s.

Mobile is continuing to grow. The internet share of advertising is continuing to grow. So you know, overall, the economy is starting to recover. And some parts of the economy are doing extremely well. And that's reflected in what we're talking about today.

CRUMPTON: Yes. Let's discuss the private company landscape right now. You break it into three groups. The first is secured content and threat management. And we see a company like Fidelis. Are these prime candidates to be snapped up by a Microsoft or even an Oracle?

MONTGOMERY: Probably more of the security players. I mean, we're talking specifically about cyber security. Fidelis has deep packet inspections. They really look at what's coming across the internet in terms of corporate threats. Quite a bit of their business is with the U.S. government market.

They're growing rapidly. This is an area that, you know, is really deserves quite a bit of attention in IT spending. So at some point in time, they're going to be large enough to have a lot of interest from a Symantec of McAfee which is now a part of Intel or some of the larger players who really need to have that expertise.

CRUMPTON: Now, your second group in private IT companies is the secure and vulnerability management sector. And we see a company like Solara (ph). Why would big companies be interested in it?

MONTGOMERY: Well, it's interesting. Last weekend, we read about the RSA tokens being broken. And I was discovered by a company called NetWitness. NetWitness was recently acquired by EMC which also owns RSA.

And the network forensic software that NetWitness used and they've sold for about 10 times their software revenue. So it was a big multiple. It was absolutely critical for them to maintain their edge in security. Solara (ph) is one of the few companies remaining independent in that area.

Whether you're a government contract or a large IT vendor, you're going to need that expertise. And you know, I'd expect that we (ph) will be knocking on their doors, too. I mean, when you have a great company and you're growing rapidly, you're constantly going to have options whether as to go public or get sold or financed.

And you know, some industries, you know, just attract a lot of attention. And this is an area that's just going to have a lot of heat around it.

CRUMPTON: Yes.

MONTGOMERY: And these are, you know, the best companies always get the highest offers.

CRUMPTON: And you have a third group as well - identity and access management. A company in that space, for example, is Simplified. Why would this company be snapped up by the big guys?

MONTGOMERY: Well, I think they probably can grow a big company there. But you know, the security space, the number one issue that people on moving to the cloud is security and access. And you know, there's some companies out there and Simplified is one.

They're just doing a great job of controlling access and managing the access and single sign-on. And it's just a great company. They can grow a billion dollar company in that space. And I imagine they'll probably do something like that.

And someone tries to buy them along the way, that would make sense. But you know, I think they could grow a really big company in that space. And it's a big problem. It's an opportunity for a number of people to grow big companies. And they have a good management team.

I see that, you know, as being just a hot company. And again, any hot company will have a number of exit (ph) alternatives.

CRUMPTON: Yes. Mr. Montgomery, speaking of hot companies, we've been showing our viewers on the screen that you founded your company back in 1986. It's been 25 years. That's a quarter of a century.

MONTGOMERY: Yes.

CRUMPTON: Do you ever recall during that time...

MONTGOMERY: Yes.

CRUMPTON: ...seeing this much velocity in the sector?

MONTGOMERY: Yes, this reminds me of 2007, 2008. There are good companies. The private financing markets are more robust than I've ever seen. There's some unique aspects of the market, a secondary market where companies are buying founder shares...

CRUMPTON: Yes.

MONTGOMERY: ...and providing liquidity to the founder is unique. The old days, companies will go public a little bit earlier in the mid to late nineties. Now, you're having a large private investment coming in and taking the role of the early IPOs.

The IPO market is coming back. You know, it will never be what it was. But the private capital markets are certainly the most robust. I think M&A is on a steady recovery and one that we'll see build over the next three or four years.

CRUMPTON: And then seeing over the next three or four years, as you mentioned, is M&A the space to be if you're looking for growth? We were talking to some people earlier this week.

And for the health care sector for one example, it might be better to make an M&A deal because research and development would take too much time.

MONTGOMERY: Well, yes, health care has been a tough sector with the, you know, FDA being slow to approve companies, the concerns about what can be reimbursed. You know, if things become clear there or there are consumer disposable, people are going to spend their own money on, I think you'll see a lot pick up.

The big biotech companies and pharma companies have a lot of drugs coming off of patent and they need to replace that revenue stream. So clearly, they'll be making defensive acquisitions just to maintain their scale.

CRUMPTON: James Montgomery, he's the CEO and Founder of Montgomery & Company, joining us from San Francisco. Mr. Montgomery, thanks so much for your time. We really appreciate it.

MONTGOMERY: Thank you very much. A pleasure to be here.

CRUMPTON: You, too.

14:39

***END OF TRANSCRIPT***

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