When buyout shop
JMI Equity, which backs software, Internet and business services companies at all stages of development, regularly places executives in its portfolio companies. In the DoubleClick deal, JMI plucked from its own ranks Venture Partner Bob Sywolski, a former CEO at Blackbaud Inc., to become executive chairman of DoubleClick’s board.
Said Paul Barber, general partner at JMI Equity, “You’ve got to partner with people who know the assets.”
Together Hellman & Friedman and JMI Equity wrote an equity check of about $340 million—most of that coming from San Francisco-based Hellman & Friedman—as part of the $1.1 billion delisting of DoubleClick Inc., a company that helps manage banner ads on Web sites. Earlier this month, the firms netted an 8x return on their money when they sold the company to Google for $3.1 billion.
As buyout firms flood into the technology and health care markets, they’re running into venture capital firms more and more often. Sometimes, as with DoubleClick, they partner with them on deals. LBO shops
Buyout firms are also providing exits for venture capitalists through leveraged buyouts, add-on acquisitions, and take-private deals.
To be sure, the line between buyout and venture capital firms has been blurring for some time. Firms with roots in early stage deals, among them,
One is the near collapse of the IPO market, a development that has encouraged venture capitalists to look far more often to the M&A market for exit opportunities. According to data from Thomson Financial, publisher of Buyouts, IPOs of VC-backed companies are at their lowest levels since the late 1980s. In the late 1990s it wasn’t uncommon to see well over 100 venture-backed companies go public in a given year. But the years 2001 to 2006 saw, respectively, just 37, 21, 27, 83, 44 and 53 IPOs of venture-backed, U.S.-based companies. Year to date there have been 20.
Meantime, LBO firms have rushed into the technology market, brining an appetite for companies that, if they’re not already generating consistent cash flows, show the promise of doing so in the near future. From the start of 2004 through early this year, buyout firms as a group sponsored 125 tech deals globally with an average size of $1.4 billion, according to research by investment bank McNamee Lawrence & Co. By comparison, in the same time period, IBM purchased 46 companies, with an average deal size of $335 million; Cisco purchased 42 companies, with an average size of $353 million; Oracle purchased 30 companies, with an average size of $1.6 billion (though the median was $184 million); and Yahoo purchased 26 companies, with an average size of $106 million. As a group, LBO firms are the largest buyer of tech companies, and their appetite has only been growing, according to the investment bank.
The trend hasn’t been lost on exit-starved venture capital firms. A survey of venture capitalists conducted in December by the National Venture Capital Association reported that more than 70% of venture firms expect sales to LBO shops to become “a more attractive exit option” this year.
Side By Side
The maturing technology industry has clearly gotten the attention of the largest LBO firms. Witness such outsized deals as the $17.6 billion buyout of Freescale Semiconductor and the $11.3 billion buyout of SunGuard Data Systems.
But LBO shops can sometimes seem like giants lumbering through the fast-growing sprouts in the technology market. While the LBO firm cuts the check and brings the vast deal experience and the resources of a larger firm, a specialist helps both in identifying staff and add-on acquisitions.
Large buyout shops can bring in a manufacturing executive to run a defense company, said JMI Equity’s Barber, but software’s skill set is much more specific. DoubleClick’s Sywolski, for example, had previously been CEO of Blackbaud, another Hellman & Friedman and JMI Equity company.
“We’ve invested in 80-plus software companies, and we are in contact with hundreds more each year,” said Barber. Hellman & Friedman, he said, simply isn’t out calling on $20 million, fast-growing technology businesses. “These businesses are the world we travel in,” Barber said.
Francisco Partners has been active in partnering as well, having teamed with Insight Venture Partners and
Direct purchases of venture-backed companies by LBO firms remain rare, but there have been a few recent examples.
When TA Associates paid $175 million to buy Alere Medical Inc., a patient monitoring company, it cashed out some of its several backers, which included
Reno, Nev.-based Alere Medical monitors a person’s biometric data, looking for signs of ailments like heart failure or diabetic episodes. The company saves insurers money because people who show early warning signs can be treated before an expensive trip to an emergency room.
At the time of the exit, the venture capital consortium had achieved a lot, helping the company expand its service areas from cardiovascular diseases to include asthma, chronic obstructive pulmonary disorder and diabetes. MTS Health Investors Senior Managing Director Curtis Lane said there were more avenues for diversification, but “given how much value we created through that initial expansion, we decided it was a good time to exit.”
TA Associates said it plans to expand the company’s product line and seek out new customers.
When San Francisco-based Francisco Partners purchased Jerusalem-based Ex Libris last year, it was also dealing with a venture group that was ready for an exit. The Jerusalem-based maker of software for libraries was performing well, but was not at the level of sales and growth where it could go public, said Francisco Partners’s Golob.
Francisco Partners knew it would be able to build the company through add-ons and otherwise investing heavily. As for the venture backers, which weren’t disclosed but which exited the investment completely, their hold period had been lengthy. “They were just tired,” said Golob.
A more common way for LBO firms to provide exits to venture firms is by making bolt-on acquisitions to their platform companies. In these cases, LBO firms are acting as synergy-reaping strategic buyers. With a platform already in place, the LBO firm doesn’t have to worry about cash flows that can support leverage.
Silicon Valley-based Silver Lake, in the process of raising a $10 billion targeted tech fund, has done a number of these deals. One of its portfolio companies, Serena Software, bought
Companies backed by buyout firms can sometimes have an advantage over publicly traded strategic buyers when chasing these bolt-on deals, said Alan Austin, Silver Lake’s chief operating officer. For one thing, they do not have to worry about justifying a dilutive deal to investors. An LBO shop is the kind of buyer that “can take a much longer view,” Austin said.
Francisco Partners has also bought a few VC-backed companies through its portfolio. Primavera Systems, a software maker, recently purchased Prosight, whose investors included
Giles McNamee, co-founder of McNamee Lawrence & Co., said that such add-on deals by Silver Lake and Francisco Partners are becoming more and more commonplace. “There are very few deals we do where there aren’t a few PE guys in the mix,” McNamee said. “A third of the time they end up being the buyer.”