New Yorker vs. MBOs
Private equity has been getting a barrage of popular press coverage, due largely to mega-deals for companies like HCA, Aramark and VNU (Kinder Morgan, for whatever reason, keeps being treated like a middle child). Most of said coverage, however, seems to have been assigned by unimaginative editors who want to know either: “Are large fund sizes driving large deal sizes?” or “Is this a bubble?” Important questions to be sure, but also ones that this space and others have been asking – and answering affirmatively – for well over a year.
So it was with appreciative surprise that I read James Surowiecki’s latest New Yorker column, in which he argues that management buyouts are fundamentally flawed. In short, he uses academic studies to claim that MBOs present an unavoidable conflict of interest between management and shareholders, with the former wanting to keep the sale price low (since they’re participating) and the latter wanting to raise it higher (since they’re exiting). Moreover, Surowiecki wonders if many MBO-backed companies wouldn’t have been better off staying public, and then instituting similar asset sales or leverage restructurings. Independent directors, of course, are supposed to navigate such conflicts, but Suroqiecki correctly points out that they often are appointed by their senior management pals.
What makes this piece mandatory reading is that it runs counter to conventional private equity wisdom, in which management buyouts are morally preferable to hostile takeovers. In fact, it slaps such wisdom in the face. So I ask you, dear readers, to take a look and then let me know what you think. My overall opinion is that his arguments are compelling, but I also can find a couple of trouble-spots:
*** Where is the anecdotal evidence that independent directors are not acting as proper fiduciaries? HCA’s special committee, for example, intentionally kept the door open for a higher bid, by preventing KKR/Bain/Merrill from syndicating their equity with other large private equity firms (i.e., prospective bidders). He does write that Aramark got a little more value after shareholders complained, but then dismisses the additional $1.80 per share as insignificant. If this is so little money, how come both TH Lee Partners and Carlyle dropped out of the SunGard deal last year after the bidding rose from $34 to $36 per share?
*** Surowiecki does not give much weight to the operational expertise of LBO firms. I’ve been a major critic of LBO firms writing management contracts with their own portfolio companies — because such responsibility should be automatically assumed – but I also understand that portfolio companies usually benefit from LBO firm involvement. Bain, Blackstone, KKR, etc. have all been through countless subsidiary spin-offs/sales, leverage recaps and senior management searches. Most corporate boards have been through just a few, if that.
Surowiecki also compounds this rhetorical failing by suggesting that the main benefit of going private is the private status itself. In other words, companies go private to avoid regulatory headaches, Wall Street expectations and a vast sea of owners. No mention of how a company might really want someone like TPG’s James Coulter as an active director.
To buttress his point, he asks why more companies don’t stay private. I believe this is the wrong question (again, because it ignores LBO firm value-add), but also must point out that more and more LBO-backed companies are, indeed, staying private. Part of this is thanks to a lousy IPO market, while another part is that LBO firms have become far more comfortable with sponsor-to-sponsor sales. Certain deals need to be exited publicly (HCA, SunGard, etc.) because there aren’t many viable buyers, but staying private has become a far more acceptable option.
Adam Aircraft Inc., an Englewood, Colo.-based maker of carbon composite aircraft for the twin piston and very light jet markets, has raised $93 million in Series F funding. DCM-Doll Capital Management led the deal, and was joined by Mesirow Financial, W Capital Partners, D.E.Shaw Laminar Portfolios and Acadia Woods Partners. Return backers include Goldman Sachs and Hunt Growth Capital. www.adamaircraft.com
Ablynx NV, a Belgium-based drug company focused on a novel class of antibody-derived therapeutic proteins (“Nanobodies”), has raised €40 million in Series C funding. KBC led the deal, and was joined by SR One Ltd., VIB and return backers Abingworth Management, Alta Partners, Biotech Fund Flanders, Gilde Healthcare Partners, GIMV and Sofinnova Partners. The company has now raised €70 million in total VC funding since its 2002 inception. www.ablynx.com
Sony Pictures Entertainment has acquired Grouper Networks Inc., the Sausalito, Calif.–based host of a user-generated video sharing website. The deal is valued at $65 million, with Grouper management remaining in place. Grouper has raised around $4 million in VC funding from DAG Ventures and T-Online Venture Fund. www.sonypictures.com www.grouper.com
Jasper Systems Inc., a Mountain View, Calif.-based provider of wireless data services, has raised $20.6 million in Series B funding, according to a regulatory filing. The company is run by Kineto Wireless co-founder Jahangir Mohammed, and is backed by Benchmark Capital and Sequoia Capital. www.jasperwireless.com
Replisaurus Technologies Inc., a Sweden-based developer of electro-chemical pattern replication technology, has raised $14.4 million in Series A funding. Wellington Partners and Northzone Ventures co-led the deal, and were joined by seed backers KTH Seed Capital, FBBB and Aumar. In other Replisaurus news, the company has named former SUSS MicroTec executive James Quinn as its new CEO. www.replisaurus.com
Iamba Networks Inc., a Cupertino, Calif.-based provider of fiber-to-the-premises solutions, reportedly has raised $8 million in new VC funding. Cedar Fund led the deal, and was joined by return backers Giza Venture Capital and Pitango Venture Capital. www.iamba.com
B-hive Networks, an Israel-based provider of enterprise data network solutions, has raised $7 million in Series A funding. Venrock Associates and Index Ventures co-led the deal, which follows a $500,000 angel round from last October. www.bhive.net
Inlet Technologies, a Raleigh, N.C.-based provider of digital data compression technologies, has raised $4.4 million in additional Series B funding. The company previously held a $5 million first close on the round in June 2005. Core Capital Partners led the tranche, and was joined by return backers Technology Venture Partners, Telecommunications Development Fund and Capitol Broadcasting. The news was first reported by TechJournal South. www.inlethd.com
Thousand Hills Venture Fund, a for-profit venture capital firm focused on Rwanda-based companies, has formed Rocket 2020, a Denver-based provider of small business services and technologies in Rwanda. No financial terms were disclosed. www.thvf.com
TNT NV, a Dutch postal and express mail company, is close to an agreement to sell its logistics division to Apollo Management for €1.48 billion. Approximately €15 million of the deal is in the form of equity in the new company. Apollo beat out PAI Partners for the deal. www.tnt.com
ITV PLC has agreed to sell its stake 45% in Irish broadcaster TV3 to Doughty Hanson for around €70 million.
CAI Capital Partners has agreed to acquire GLM Tanks & Equipment Ltd. from Tanglewood Companies. No financial terms were disclosed for the deal, which is expected to close on August 31. GLM is an Edmonton, Alberta-based maker of steel tanks, vessels and process equipment for the oil and gas, mining, food processing, chemical and pulp and paper industries. www.caifunds.com www.glmtanks.com
MCG Global has acquired Novations Group Inc., a Boston-based provider of consulting and training services, from Meitec and Drake Beam Morin-Japan. No financial terms were disclosed for the deal, which was done in concert with senior company management. www.novations.com
Healthpoint Capital has acquired BioHorizons Implant Systems Inc., a Birmingham, Ala.-based provider of oral reconstructive devices like dental implants and tissue regeneration products. No financial terms were disclosed. First Albany Capital advised BioHorizons on the sale. www.healthpointcapital.com www.biohorizons.com
Tourneau, a privately-held luxury watchmaker, has retained Duff & Phelps to find a buyer, according to the New York Post. The deal could be worth between $300 million and $400 million, and comes after failed takeover talks with J.H. Whitney & Co. www.tourneau.com
Apollo Management has made it to the final round of bidding for Bertelsmann’s BMG music publishing group, according to The Telegraph of London. The deal is expected to be worth up to $2 billion, with other bidders including GS Capital Partners, GTCR, KKR (teamed up with EMI), Universal and Sony.
Warburg Pincus reportedly is among the bidders for a major stake in Chinese retailer Beijing Wangfujing Department Store. The deal could be valued at more than $180 million, according to Reuters.
The Blackstone Group has received EU regulatory approval for its proposed $4.3 billion buyout of Cendant Corp.’s travel distribution services unit. www.blackstone.com
Weyerhaeuser Co. (NYSE: WY) shares rose 5.22% yesterday, after a Deutsche Bank analyst report suggested that it could be the target of an unsolicited buyout offer. Then it announced this morning that it will spin off its fine-paper business into a new public company, in partnership with Canadian paper company Domtar. www.weyerhaeuser.com
New Oriental Education & Technology Group Inc., a Beijing-based provider of private educational services in China, has filed to raise $112.125 million via an IPO of American depository shares. It plans to price 7.5 million ADS at between $11 and $13 per share, with each ADS representing four common shares. New Oriental will trade on the NYSE under ticker symbol EDU, with Credit Suisse and Goldman Sachs (Asia) serving as co-lead underwriters. Shareholders include Tiger Global Private Investment Partners.
EQT Partners is planning a November flotation for portfolio company Symrise GmbH, according to the Financial Times Deutschland. Symrise is a German maker of flavors, fragrances and aroma chemicals. HarbourVest Partners also is a shareholder. www.symrise.com
Comverse Technology Inc. (Nasdaq: CMTV) has agreed to acquire Netonomy Inc., a Paris, France–based provider of self-service, bill analysis and point of sale solutions. The deal is valued at $19 million in cash. Netonomy has raised around $36 million in total VC funding, from firms like Atlas Venture, Fidelity Ventures and Viventures. www.comverse.com www.netonomy.com
Dada Mobile Inc., a New York-based subsidiary of Dada SpA (Italy: MTAX), has acquired Upoc Networks Inc., a New York–based provider of wireless Internet content, community and commerce solutions. VentureWire reports the sale price to be $7 million in cash. Upoc had raised around $27 million in VC funding from firms like Advent International, Apax Partners, 550 Digital Media Ventures, Allen & Co., Arts Alliance Advisors and Tribune Ventures. www.dadamobile.com www.upoc.com
Harmonic Inc. (Nasdaq: HLIT) has agreed to acquire the video networking software business of Entone Technologies Inc., a San Mateo, Calif.-based company that will retain its consumer premise equipment (CPE) business. The deal is valued at $45 million, including $26 million in cash and around 3.54 million shares of Harmonic common stock. Hamonic also will assume $1.5 million in liabilities and invest $2.5 million (via a convertible note) into Entone’s CPE business. Entone has raised around $23.5 million in VC funding from BA Venture Partners, Menlo Ventures and Palomar Ventures. www.harmonicinc.com www.entone.com
PlattForm Holdings Inc., an Olathe, Kansas–based provider of enrollment solutions to the post-secondary education market, has acquired PFP Advertising Inc., an Internet lead generation company.No financial terms were disclosed. PlattForm is a portfolio company of Arlington Capital Partners. www.plattformad.com
Protliax, an Israel-based developer of cell culture technology and bioreactor systems for the production of human therapeutic proteins, has agreed to a reverse merger with Orthodontix (OTC BB: OTIX). Following the deal, Protalix shareholders will own 85% of the company, while the remaining 15% will belong to Orthodontix and the Frost Group (which just invested $20.3 million into Protilax). Protilax previously raised VC funding from firms like Tamares Capital, Marathon Investments, Docor International, Atara Technology Ventures, Pontifax, Biocell, Technorov Holdings and Ziff Asset Management. www.protalix.com
Firm & Fund News
De Novo Ventures has closed its third fund with $300 million in capital commitments. The firm will continue its focus on medical device companies and biotech companies with with initial human clinical experience. www.denovovc.com
Jahangir Siddiqui Group, a Pakistani financial services company, has held a $70 million first close on its inaugural private equity fund. Limited partners include the International Finance Corp. (World Bank), SAMBA Financial Group of Saudi Arabia, DCD Group and Global Investment House of Kuwait. www.js.com
David Deno has agreed to join CCMP Capital Advisors as a managing director. He has spent the past 15 years with Yum Brands, including a recent stint as chief operating officer. CCMP is the spinout firm recently launched by the buyout/growth equity team of JPMorgan Partners. www.ccmpcapital.com
Alan Botsford has been named a managing director with Clark Benson, a recently-formed Clark Consulting subsidiary that focuses on financial planning, wealth transfer and employee benefits. He previously had been a partner with Parthenon Capital.
Maurice Coleman has left Delta Airlines, where he was a director of alternative investments. www.delta.com
Andrew Parker has agreed to join Union Square Ventures as an analyst, effective September 5. He previously was a product designer with Homestead Technologies Inc. www.unionsquareventures.com
Bill Norris, founder of Control Data Corp., passed away Monday at the age of 95. Norris had been an active supporter of the Minnesota venture capital community.