FleetBoston Financial Corp. has joined Merrill Lynch & Co. and Credit Suisse First Boston as investors in CapitalKey Advisors Inc., a new online investment bank that is aiming to scoop up small merger-and-acquisition deals that bigger firms turn away.
As part of the transaction, which could be announced as soon as today, FleetBoston will offer CapitalKey's services to smaller clients that they might otherwise overlook. In May, Merrill and Credit Suisse announced similar arrangements with the New York-based start-up. Merrill and Credit Suisse each invested $5 million and FleetBoston's outlay was of a similar amount, according to CapitalKey.
Large-cap investment banking firms tend to shy from small businesses because the traditional M&A and corporate finance approach requires lots of costly hand-holding. The idea behind CapitalKey is that online technology and a sophisticated database of investors can eliminate much of the expense that makes small business advisory services so unattractive. CapitalKey is targeting clients with less than $100 million in sales.
"What we've done in the past is tend to refer that business to small regional boutiques," said Robert Brown, a managing director at FleetBoston Robertson Stephens, the investment banking unit of FleetBoston. The boutiques have limited resources and reach "into the prospective buyer market," he said.
CapitalKey, founded by Lehman Brothers Inc. investment banker Neal D. Goldman, is aiming to build a small-deal marketplace in which, in a Bloombergesque-fashion, at least five big-name investment banking firms pool the clients that fall under their normal radar screen. The 60-person company is aiming to raise $30 million to $50 million.
CapitalKey opened in December and has completed three deals. The firm differentiates itself from online sites such as Garage.com Securities and OffRoad Capital Corp. Those companies focus on helping "seed-stage technology companies," while CapitalKey is making a much broader play, Mr. Goldman said. For example, CapitalKey found an investor to provide $7 million to several photo studios who wanted to consolidate.
"We have spent almost two years now developing all that data so that we can push a button and develop that buyer list very quickly," said Steven B. Turner, a former Bear, Stearns & Co. investment banker who is CapitalKey's other managing partner. "What could take 40 to 100 hours can take us 30 minutes."
Of the three investment banking partners, Merrill is the first to announce a co-branded service. Mr. Brown said FleetBoston will "stay part of the process, but not actively manage," at least initially.
Merrill, which offers many other small-business services, has a middle-market group, but does not find M&A deals with companies of less than $30 million to $40 million in sales worth their while.
However, "by referring [clients] to someone else, we break that bond and run the risk of losing that relationship," said Kevin Albert, managing director and head of Merrill's private sales and divestitures group, which serves middle-market clients. "I'm going to have real live people that work for me who are going to interface with real live people who work at CapitalKey."
Mr. Goldman said the intention is to make small-deal advisory services more efficient and profitable. "We are making a service offering that is standardized, not like buying toothpaste yet, but close," he said.
