Morgenthaler Does Mini-Recapitalization: Difficulty can spur creativity. –

Take Cleveland, Ohio-based buyout and venture capital firm Morgenthaler‘s recent investment in Extrusion Technology LLC – the firm uncharacteristically took a minority interest. Extrusion Technology is a Boston-area maker of aluminum extrusions for the communications industry.

Originally, Morgenthaler intended, as it almost always does, to take a majority stake in Extrusion Technology pursuant to a recapitalization involving new equity, mezzanine and senior bank financing. But with the softening of the communications sector came the realization that the original terms of the transaction were “not applicable;” that is, feasible or advisable, said Scott Fine, a general partner with Morgenthaler. Fine and partner John Lutsi led the deal.

“Telecom spending was slowing, but we still really liked the business, the business model and the management,” said Fine. He added that Morgenthaler believes, despite the current market downturn, that the telecommunications industry will “grow significantly” over the next five years.

Thus, the firm decided to pursue a more modest recapitalization that would involve less initial equity and much less debt – what Fine called “a mini-recap.” Though he declined to site details of the transaction, Fine did say that his firm typically invests $40 million to $50 million in a company, and at a minimum, $15 million to $20 million. This investment was below that minimum.

“But the second entrance should bring the total amount in step with the firm’s profile,” he said, or up to $50 million.

In other words, while this “mini recap” provides some liquidity for the owners, Jim Sharpe and his wife Debby Stein Sharpe, as well as ongoing control of the business, Morgenthaler and the Sharpes agreed to undertake a broader “more traditional” approach, Fine said, continuing the recapitalization when the communications market recovers. Fine predicted the second recap will take place in a year or two. This would give the firm the majority stake it originally intended to have.