Investor Predicts Even More Carnage From Tech Wreck.

You think the April "tech-wreck" was tough on e-commerce companies?

You haven't seen anything yet, according to James Montgomery, founder and managing partner of Santa Monica-based Digital Coast Partners, an investment banking and venture shop.

"There are just tons of (Web-based) companies running out of cash, with big bum rates, that were fully planning on getting their third or fourth round of equity but aren't going to get it," Montgomery said. "I expect absolute carnage in the next 60 to 180 days. People are going to be looking for jobs, and you are going to see a lot of (office) space open up on the Westside."

In fact, one major Web outfit asked Montgomery last week if he had any use for 60,000 square feet of Westside space it planned to sublease soon.

Before the e-business meltdown last spring, Montgomery was breezily discussing raising and investing a couple hundred million dollars through a new venture tech fund. But things have changed.

"As I watched the market unfold, I thought to myself, 'You know, cash isn't such a bad place to be,"' said Montgomery. "We are still raising the money, but we are taking it slowly."

But as always in the world of money, one investor's misery is another's ecstasy. Montgomery's new thinking? "Consolidation, restructuring, mergers -- that's what we are doing," he said of the 20-odd investment bankers he keeps under roof.

Digital Coast Partners recently helped engineer a $151 million merger between publicly held Viasource Communications Inc. and Telecore Inc., with Montgomery representing the latter outfit. Indeed, Digital Partners is busily working the consolidation market, and taking fees amounting to much more than some private equity stakes in startups.

"You know, you arrange a $5 million sale, and you get 5 percent of that in fees,' said Montgomery. "Well, you have to keep the bankers paid."

To be sure, Montgomery hasn't totally given up on the VC game. He still has his Digital Coast Ventures business incubator -- it's now referred to as a "seed capital" shop -- in a converted bank building in Santa Monica. He has $35 million ready to back e-companies and has funded three so far.

Woe Is Imperial Credit

The tale of Torrance-based Imperial Credit Industries Inc. is less kingly for investors with each passing quarter.

The diversified business lender committed one of Wall Street's cardinal sins back in August, when it was forced to restate second-quarter earnings -- sharply downwards.

The action followed an audit by the Federal Deposit Insurance Corp. of loans extended by Imperial subsidiary Coast Business Credit. FDIC bean-counters required a "surprise" $40 million write-down of dubious loans, and Imperial Credit subsequently posted a net loss of $19 million (58 cents a share) for the second quarter, compared to the previously reported net profit of $14.9 million (44 cents) for that period.

"The timing could not have been worse," said the straight-talking Wayne Snavely, Imperial chairman and CEO, of the write-down. "Only eight weeks earlier I told institutional investors that (the second quarter) had been our turnaround quarter. That didn't help my credibility."

Feeling burned, mutual funds in particular have been selling Imperial stock and looking for tax losses to post against gains, said Snavely. "What you have is a situation where there are sellers and no buyers," he said.

With a market cap of just $50 million, Imperial Credit is now a poster child for the "orphan stock" society -- small caps that lack institutional sponsorship and so are essentially homeless on Wall Street.

Indeed. Imperial Credit stock, which nearly hit $30 a share in 1997, fell to under $2 a share in trading last week. Both PaineWebber and Friedman Billings Ramsey have downgraded the stock recently. But Imperial Credit may be the perfect catch for bottom-fishers.

Snavely said the worst is history, and 2001 will almost surely be a profitable year. He also pointed out that the book value of Imperial Credit is more than $5 a share. And Imperial has bought back almost $100 million (face value) in debt, and $10 million in common stock in the past year.

Analysts have predicted that Imperial Credit will earn about 90 cents a share next year. If true, that means it's selling for about two times next year's earnings. It doesn't get too much cheaper than that on Wall Street.

Between the Sheets

As widely reported in industry literature and academia, most money managers do not outperform market indexes. That fact is a tribute to the enduring explanatory value of Burton Malkiel's seminal 1972 work, "A Random Walk Down Wall Street." The book's premise is that much about the future is imponderable, and that which is knowable is already factored into a stock's price.

So it was we came to reflect on Marshall Geller, veteran Westside investment banker. A few months back, Geller, who until recently sat on the board of linen retailer Strouds Inc., talked optimistically about the company's chances, both on Main Street and on Wall Street.

Web sales, though modest, were growing, and new stores were being built. If ever there was a knowledgeable investor in Strouds, it was Geller. Since then, Strouds declared Chapter 11.

Geller, meanwhile, has stepped off the board and has been trying to engineer a new capital infusion for the retailer, which he says is still profitable. If things work out, shareholders could participate in the capital infusion and thus retain an ownership stake, said Geller.

Strouds filed for Chapter 11 because certain inventory lenders tightened credit to the point where it suffocated Strouds, according to Geller. Just when Strouds needed to buy lots of new cloth to satisfy growing demand, Geller said, "the lenders wouldn't give any more credit. Same-stores sales are actually up."

Last week, Geller shrugged his shoulders at the turn of events at Strouds. "You win some, you lose some. That's what happens when you risk capital," he said.

But if Geller was caught off guard by events at a company where he sat on the board, imagine the prospects for money managers, who own dozens of stocks and never visit boardrooms or even corporate headquarters.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.