Monday Mouth-Off
The sky is gray, the beloved Red Sox are done (in Theo we blame) and I’m refreshed after a weekend on Cape Cod. In other words, it’s time for some Monday Mouth-Off.
Today’s edition is devoted to last Wednesday’s discussion of James Surowiecki’s latest New Yorker column. In short, Surowiecki had argued that management buyouts are fundamentally flawed, while I found a few flaws of my own in Surowiecki’s argument. A huge response, and what follows is a sampling:
David: “A few key points jump to mind after reading this article. Yes it is true that there are some conflicts of interest but there are also three other factors core Wall Street tenets that counter-balance this issue including the risk-reward mantra (CAPM model), free market economies and the freedom to take legal action.
Risk-reward: One thing missing from the article is the emphasis on some of the failed MBO transaction. Having been on the buyer side (as an advisor) I can tell you that they are not all lay-ups. There are many risks in taking companies private including paying the premium to the market, paying the legal, banking and financing fees and trying to generate a return above a benchmark beyond all of the aforementioned. Yes, management knows where the bodies are buried but they are also the ones, in some cases who buried those bodies.
Free market economies: If the MBO team is not offering the best price, someone else will. Each billion dollar fund and mega billion fund is just itching to put that money to work and if there is a bargain to be had (risk adjusted of course) they will take advantage of it and squeeze out extraordinary profits.
Freedom to take legal action: Sometimes companies need to be private in order to accomplish some of the housecleaning needed to right the ship. As public companies if they did take such actions there would be tens of class action securities lawyers waiting for things to go wrong. As a private company there is, in most cases only a handful of financial firms/shareholders involved (and debt holders) who are sophisticated investors and understand the risks going into the deal.”
Carol: “I think that the article raises some good points and is on target in many regards.However, my biggest point of disagreement is the statement: ‘With few exceptions, these restructurings could be done before buyouts. But they’re not, in part because executives would rather wait until they own a bigger chunk of the company.’ This accusation would probably hold true in some cases. However, I think it’s a simplistic view of reality. As you correctly point out, the LBO firms add value via their expertise in executing previous restructurings. In addition, these restructurings are hard work. To assume that, were it not for management’s greed and self interest, these restructurings would seamlessly take place and result in shareholder wealth is shallow thinking. I think it’s often a matter of management’s complacency or lack of expertise that creates inertia and the resulting failure to maximize value for shareholders. Let’s face it, a little pressure from a knowledgeable ! third party who has a vested interest (i.e., the LBO firm) can make good things happen.”
Ralph: “One thing neither of you mention is that fairness opinions are almost always solicited by both the PEG doling the buying and the board of the seller. And that these fairness opinions usually come from a large independent IB with no vested interest in the transaction.”
Michael: “I agree with some of your comments, but the two academic studies cited are quite damning. If there is one thing we all should have learned over the last few years, when there is accounting smoke, there is indeed fiscal fire. Furthermore, the conflicts of interest listed are, in fact, quite serious, and I have lost every shred of faith that corporate boards will resolve them properly. Certainly the last few years should have taught all of us that corporate boards simply do not put stockholders’ interests ahead of management’s. Look at the unending list of outrageous and undeserved CEO salary packages if you need any evidence to that fact.”
Tom: “The New Yorker article is interesting, but wouldn’t the potential legal liability of the independent directors be enough to over-ride any close relationship they have with their CEOs? In the Trans Union case many years ago, the directors were held personally liable for voting to sell the company without undertaking sufficient efforts to confirm they were getting an appropriate price. That is a heavy price to pay. Also, in my own personal experience on boards, the non-execs are usually harder task masters on the CEO and CFO than many (even independent) chairpersons are. The CEO does certainly have a conflict, but the NED’s are there to do what’s best for the company and the shareholders.”
Top Three
Kinder Morgan Inc. (NYSE: KMI) has agreed to be acquired for $107.50 per share, or a total transaction value of around $22 billion. Kinder Morgan received a $100 million offer back in May, before which its stock had been trading at $84.41 per share. The buying consortium continues to include GS Capital Partners, AIG, The Carlyle Group and Riverstone Holdings. It now also includes Kinder Morgan chairman and CEO Richard Kinder, co-founder Bill Morgan, board members Fayez Sarofim and Mike Morgan and other management members. Leverage will be provided by Goldman Sachs Credit Partners, Citigroup Global Market, Deutsche Bank Securities, Wachovia Securities and Merrill Lynch, Pierce, Fenner & Smith. www.kindermorgan.com
Zogenix Inc., a drug company focused on CNS disorders and pain, has raised $60 million in Series A funding. Clarus Ventures and Domain Associates co-led the deal, and were joined by BA Venture Partners, Thomas, McNerney & Partners and Life Science Angels. Zogenix has offices in both San Diego and Hayward, Calif. In related news, Zogenix has paid $4 million to acquire a needle-free delivery system (Intraject) from Aradigm (Nasdaq: ARDM). The acquisition could include future milestone payments. www.zogenix.com
Mylan Laboratories Inc. (NYSE: MYL) has agreed to acquire up to 71.5% of Indian drug-maker Matrix Laboratories Ltd. (Mumbai: 524794), in a deal that could be worth as much as $736 million. Under terms of the agreement, Mylan will first acquire 51.5% of outstanding Matrix shares from holders like Temasek Holdings and Newbridge Capital. It then will make an “open offer” to acquire an additional 20% stake from remaining Matrix shareholders. Matrix will remain a listed company in India, and will continue to operate independently. www.mylan.com www.matrixlabsindia.com
VC Deals
Trapeze Networks Inc., a Pleasanton, Calif.-based provider of WLAN infrastructure solutions, announced that it has raised $30 million in Series D funding. The deal included Juniper Networks and other undisclosed network vendors. Return backers include Accel Partners, Redpoint Ventures, Oak Investment Partners, Motorola, Castile Ventures and DAG Ventures. www.trapezenetworks.com
Zend Technologies Inc., a Cupertino, Calif.-based PHP software company, has raised $20 million in Series D funding. Greylock Partners led the deal, and was joined by return backers Azure Capital Partners, Index Ventures, Intel Capital, Platinum Venture Capital, SAP Ventures and Walden Israel Venture Capital — are also participating in the Series D round. www.zend.com
Magen BioSciences Inc., a Cambridge, Mass.-based biotech company focused on the health and appearance of human skin, has raised $15.4 million in new Series A funding. The company had raised $1.84 million in seed funding earlier this year at a $4.34 million post-money valuation. Highland Capital Partners led the new tranche, and was joined by IDG Ventures Boston, GVT Financial and return backers Alexandria Real Estate, Arch Venture Partners, Lux Capital, TVM Capital and Venrock Associates. www.magenbiosciences.com
Neurosonix Ltd., an Israel-based developer of non-invasive embolic protection technology and devices for use in cardiac surgery and cath labs, has raised $12 million in new VC funding. Elron Electronic Industries Ltd. led the deal with a $5 million commitment, in exchange for an 18% stake. Other participants included Evergreen Venture Partners and return backers Peregrine Ventures, Ofer Hi-Tech and the Yozma Group. www.neurosonix.co.il
Travel Meta Search Pte Ltd., a Singapore-based meta-search engine for European and Asian travelers, has raised €8 million in first-round funding. Sofinnova Partners led the deal, and was joined by Walden International. The company was formed in June by the merger of two existing online travel search companies.
Mitrix Inc., an Irvine, Calif.-based provider of on-demand supply chain management software, has raised $10 million in Series A funding. Logispring and CMEA Ventures were joined by Mitrix parent company Mitsui & Co. www.mitrix.com
Waste Remedies, a St. Louis-based corporate consulting firm focused on waste management, has raised $8.5 million in VC funding from Advantage Capital Partners, Southwest Bank of St. Louis and company management. www.wasteremedies.com
MicroSeismic Inc., a Houston, Texas-based provider of 3D seismic imaging for both exploration and production of hydrocarbon resources, has raised $7 million in second-round funding. Altira Technology Group led the deal, and was joined by RockPort Capital Partners and return backer Chevron Technology Ventures. www.microseismicinc.com
Medusa Medical Technologies Inc., a Halifax-based developer of software for EMS providers like ambulances and first-responder fire departments, has raised Cnd$4 million in new funding from return backers InNOVAcorp and Canadian International Capital. www.medusamedical.com
Ranch Networks Inc., a Morganville, N.J.–based provider of networking appliances that facilitate carrier and enterprise-grade VoIP deployments, has raised $1 million from the New Jersey Economic Development Authority’s Techniuum Initiative. www.ranchnetworks.com
Used Cardboard Boxes Inc., a Santa Monica, Calif.-based provider of used cardboard boxes, has raised an undisclosed amount of seed funding from Funk Ventures and various angels. www.usedcardboardboxes.com
Buyout Deals
Catterton Partners and Oak Investment Partners have acquired Cheddar’s Holding Corp. from Brazos Private Equity Partners. No financial terms were disclosed amount. Cheddar’s is a Dallas–based casual dining restaurant chain with 55 locations and over $245 million in annual sales. A Brazos press release says that Cheddar’s had just 42 stores with $150 million in sales, when it acquired the company in 2003. www.cheddarsinc.com
Mason Wells, a Milwaukee-based private equity firm, has agreed to acquire The Oilgear Co. (Nasdaq: OLGR) for $15.25 per share. Oilgear is a Milwaukee–based provider of technology in the design and production of fluid power components and electronic controls. Once the deal closes, former ABB Inc. and Invensys PLC executive Richard Armbrust will be named president of Oilgear. www.oilgear.com
Permira has agreed to buy the European Frozen Foods business of Unilever for €1.73 billion. The deal includes Igo and Birds Eye brand foods in Austria, Belgium, France, Germany, Greece, Ireland, Netherlands, Portugal and the U.K. Unilever will retain its ice cream products. www.permira.com
R.R. Donnelley & Co. (NYSE: RRD) saw its corporate bonds tighten by 36 basis points on Friday, following a Crain’s Chicago Business report that the company cannot agree on price with two potential buyout consortiums. One of the groups includes Blackstone Group and Texas Pacific Group, while the other includes The Carlyle Group, Madison Dearborn Partners and Thomas H. Lee Partners. www.rrdonnelley.com
PE-Backed IPOs
Physicians Formula Holdings Inc., an Azusa, Calif.-based cosmetics company, has filed to raise $115 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol PHYS, with Deutsche Bank Securities and Citigroup serving as co-lead underwriters. Summit Partners holds a 76.8% pre-IPO stake. www.physiciansformula.com
PE Exits
Newbridge Andean Partners, a private equity fund managed by ACON Investments, has agreed to sell its interest in Columbian retailer Carulla Vivero SA to Almacenes Exito SA for $15.79 per share. The total deal values Carulla Vivero in excess of US $700 million (including debt).
Other Deals
Infinity Pharmaceuticals Inc., a Cambridge, Mass.-based cancer drug discovery and development company, has entered into an agreement with MedImmune Inc. (Nasdaq: MEDI) to jointly develop and commercialize novel small-molecule cancer drugs targeting Heat Shock Protein 90 (Hsp90) and the Hedgehog cell-signaling pathway. As part of the deal, MedImmune will provide Infinity with a $70 million upfront payment, plus the possibility in up to $430 million in additional milestone payments. Infinity recently agreed to a reverse merger with San Diego-based drug research company Discovery Partners International Inc. (Nasdaq: DPII). It has raised over $150 million in total VC funding since its 2001 inception, from firms like Prospect Venture Partners, Tallwood Venture Capital, Venrock Associates, HBM Partners, Advent Venture Partners, Vulcan Capital and Novartis. www.ipi.com www.medimmune.com
Firm & Fund News
Softbank and the State Bank of India announced plans to launch a $100 million venture capital fund targeting Indian companies in a variety of industries. www.sbigroup.co.jp
The New Jersey State Investment Council has approved a $50 million commitments to Lehman Crossroads Fund XVIII, which is targeting $750 million. It also approved a $50 million commitment to Gleacher Mezzanine Partners II. www.state.nj.us/treasury/doinvest
Human Resources
Roy Burns has rejoined TA Associates as a vice president. He recently received his MBA from the Stanford Graduate School of Business, before which he had been an associate with TA. www.ta.com
Laura Marangione has joined Candover, according to Financial News Online. She previously worked for BNP Paribas, and will help Candover open its Milan office. www.candover.com
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Corrections:
* RCP Advisors has held a $140m first close on its fourth private equity fund-of-funds, which is targeting $225m ($300m hard cap). Morgan Stanley and Carolinas Investment Consulting are not serving as placement agents.
* Sentinel Capital Partners and Nautic Partners sold Growing Family Inc. to Falconhead Capital. Sun Capital Partners was incorrectly listed as a seller.
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