Oak Investment Partners spent six months and made three bids before it could convince Divine Inc. to accept $61 million in equity financing, said Divine’s chairman and chief executive officer.
The deal is the 11th largest private investment in public equities (PIPE) out of 390 PIPEs done this year and is unusually large for a venture capital firm, according to DirectPlacement Inc., a San Diego research firm that tracks PIPEs. Oak’s investment also signals continued growing interest among venture firms to troll for deals in the depressed public markets.
Oak first approached Divine last November. “This was the third time they submitted a term sheet to us,” explains Andrew “Flip” Filipowski, CEO of the enterprise software company, which emerged from the rubble of failed incubator Divine Interventures. “We turned them down the first two times. I think they started out with an at-market [price], then they increased it to a 30% premium, and [May 29] to about a 50% premium.”
He adds that Divine had held talks with other venture houses including Battery Ventures, and that a competing term sheet had even been submitted.
Filipowski and famed investor Peter Lynch together plan to invest up to $14 million more in the next 30 days, for a total round of $75 million, Filipowski says. The additional investment by Filipowski and Lynch is subject to shareholder approval.
Divine expects to be profitable by the fourth quarter and have in excess of $200 million in cash at the end of the year. It made more sense to do a PIPE than try a secondary, since the public markets are so unstable right now, Filipowski says.
Oak is putting up the entire $61 million investment, Filipowski says, contrary to a company press release that states that the amount is coming from “a group led by Oak Investment Partners.”
Why would Oak take such a large stake – when the average PIPE is $10 million to $30 million? “Obviously Oak sees some value in the stock that the rest of the market isn’t seeing,” said Robert Kyle, executive vice president of DirectPlacement. “And they have a better look at the inside of the company than the rest of the market.”
Under the agreement, Oak will buy $23 million in convertible preferred Divine stock immediately. The shares will be converted into common stock at a price of $6 per share. Oak will buy $38 million more in convertible preferred stock after Divine’s stockholders approve the second purchase in a vote scheduled for July 31. After the second tranche, Oak will get warrants for $9.5 million in Divine common stock.
Oak gets two board seats under the deal. It has agreed not to sell its shares for one year. News of the Oak investment drove up Divine’s stock price 23% to $5.12 at market close yesterday.
Out Of Step?
The Oak deal is a little surprising on two counts, says Jesse Reyes, vice president of Venture Economics, publisher of Buyouts. First, “They’re buying into a market that’s trending downward,” he says. Second, it’s “unusual” for one private equity investor to put up such a large amount of money; it would be more typical for three investors to put up $25 million each (for the total amount Divine is raising), he says.
In fact, that’s exactly what Oak did on May 16 when it pumped $20 million into a $45 million PIPE for Wireless Facilities Inc. (Nasdaq: WFII).
Reyes adds that Filipowski’s comments about Oak’s zeal for the deal don’t jibe with the market environment.
The reason that more venture firms are considering PIPEs is because they’re able to buy into companies at very favorable valuations, he notes. Oak’s partners could not be reached for comment.
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