There’s room for deal-makers to the tiny

When the owners of Gamma Photo Labs LLC, a commercial photography specialist in Chicago with annual sales of $15 million, decided to sell out, their first challenge was to find the right investment banker to handle a sale so small.

“Because of our size, we knew we wouldn’t get a big-name investment banking firm interested in helping us. But we didn’t want to use an ordinary business broker who spends most of his time selling restaurants,” says Gamma co-owner Joseph Scher.

Enter Dresner Investment Services Inc. of Chicago, a fast-growing firm catering to small and midsize private companies. Dresner lined up four bidders for Gamma. In December, Gamma agreed to sell to Photobition Group PLC of London.

“Photobition is doing a roll-up across the U.S. of companies like Gamma, and they were a perfect fit,” says Mr. Scher. “Dresner filled the gap perfectly for us.”

A decade ago, a LaSalle Street firm like Chicago Corp. might have dealt with Gamma. But Chicago Corp. and many other regional brokerages have been acquired by national companies and taken their priorities upmarket. Chicago Corp.’s successor, ABN Amro Inc., rarely works with companies as small as Gamma.

too valuable for the small

“We can’t afford to tie up our professionals in small transactions,” explains Richard W. Durkes, executive vice-president at the securities subsidiary of ABN Amro North America Inc. “In the advisory business, there is always room for boutique firms that don’t have the heavy investment in research departments and technology that we have.”

Dresner closed 10 deals worth $225 million for corporate clients last year, all beyond the glare of big public-company deal-making.

Though it doesn’t grab headlines, Dresner is mining a niche — companies with annual sales between $5 million and $250 million — that is both lucrative and growing rapidly.

With interest rates still relatively low, money is flowing freely and buyout prices are high. Business Valuation Resources LLC in Portland, Ore., which tracks private, mid-sized deals, says there were 856 transactions in 1998 (1999 results aren’t available yet), up 63% from 525 in 1997.

Most of Dresner’s clients fly below the radar of Wall Street powerhouses such as Merrill Lynch & Co. Inc. and Goldman Sachs Group Inc., so competition for their business — ranging from valuations and private placements to recapitalizations and acquisitions — often is not intense.

Chicago-area boutique rivals with a similar focus include Stevenson & Co. in Evanston, Kensington Services Inc. in Oakbrook Terrace and Hoganson Venture Group Inc. in Hinsdale, all of which report booming demand for their services.

President and CEO Steven M. Dresner, 42, founded Dresner Investment in 1991 after leaving Arthur Andersen & Co.’s merger advisory practice. The two-dozen-employee firm closed on five deals in the fourth quarter of 1999 alone, and Mr. Dresner says four more have reached the letter-of-intent stage, including a $100 million-plus offer for a telecommunications company.

“Based on where we are now, it looks like we will easily double our business this year,” Mr. Dresner says.

But Wall Street giants elbow firms like Dresner aside when it comes time for a client to go public, an increasingly common move for fast-growing small companies in an overheated stock market.

Mr. Dresner hopes to change that soon: He’s considering both acquiring another investment banking house and adding securities trading, which would require federal regulators’ OK. Money management, possibly including a leveraged buyout fund, is also under consideration.

“This would be a natural synergy for us,” Mr. Dresner says. “We sell companies for owners who end up with anywhere from $5 million to $100 million in their hands, and they need a place to invest it.”

Deal-making in the private market requires the patience and sensitivity of a skilled therapist.

George A. Petrulis, managing director of Kensington Services, spent nearly a year arranging the December sale of Laser Graphics Inc., a $6 million prepress printing company in Hillside, Ill.

“It takes as much effort to sell a small company as a large one,” he says. “The owner of a private company finds himself in a very emotional situation when he decides to sell.”

Most boutique bankers follow the same formula for commissions: 5% on the first $1 million in sale proceeds, 4% on the next $1 million — sliding down to 1% on proceeds above $5 million.