PE Week Wire, Nov. 20, 2006

The sky is clear, Judith Regan is without conscience and HCA is no longer the largest-ever leveraged buyout (wow, that was fast). In other words, it’s time for Monday Mouth-Off:

First up are reactions to last week’s audio interview with Ben Stein at Larry writes: Your discussion with Ben Stein was superb. I think Ben has identified the real problem with public to private transactions.He is absolutely correct that management wouldn’t make the investment if they didn’t think they were getting a “deal.”And that deal is clearly at the expense of the existing shareholders.I also think he is having some impact in the “market.” Note the following lawsuit, which claims that management has insider information in one such deal.One data point does not make a trend, but…”

N adds: “You know what’s funny about your commentary this morning? I wrote Ben Stein back after I read that NY Times commentary he wrote. I agree 100% with your thoughts on the matter (there’s some conflict, but why isn’t it exploited by the market?) and pretty much wrote them in the same context that you stated.His response? He basically told me I was an idiot. In those words. Hopefully he was nicer to you.” He was…

*** On a related note, I asked you to tell me why it is acceptable for LBO firms to have

greater access to corporate information (via due diligence) than do shareholders who ultimate vote on the deals. Matthew answers: “Companies can not give every shareholder access to proprietary information (i.e. customer lists, customer/supplier contracts, R&D pipeline, trade secrets, etc.). The reasons are obvious. The main reason is the risk that the information would be leaked increases dramatically when you provide it to thousands of people.The short answer is that LBO firms get greater access because they make the risk/return equation for the board is higher.There is less risk of information leaking due to the fact that it is going to a limited audience bound by multiple CAs and there is the higher probability of a return to

shareholders based upon the LBO firm’s initial indication of interest (not to mention the LBO firm’s track record of actually closing transactions)! .

Let me put it this way, if Blackstone offered to buy Coca Cola for a 25% premium assuming it had full access to conduct diligence (and that diligence checked out), the board of Coca Cola would have an obligation to let them conduct diligence. Are you suggesting that Pepsi should get the same access if it bought one share of Coca Cola’s stock? What about if an individual in Pepsi’s corporate development group bought a share in his or her personnel account? Should that person get the same level of information? What about any other shareholder? Wouldn’t that shareholder now have “non-public” information about Coca Cola and thus be restricted from trading in it’s securities? You end up in a situation where Coca Cola needs to disclose everything. Very slippery slope.”

William concurs: “Whether ‘acceptable’ or not, a potential acquirer should have more access to information for an obvious reason – it has signed an NDA.As you know, due diligence can disclose information that would be damaging in the hands of the competition or customers. Public disclosure of all such information (i.e., disclosure to the shareholders) could seriously harm the very shareholders about which you are concerned. Keeping such information closely protected is one of the reasons why we have Boards of Directors to represent shareholders’ interests. Certainly not a perfect system, but the alternative would be far worse.”

*** Michael on mega-LBOs: “I’m not a big fan of the mega-buyouts.They… just seems like a big way to generate fees for the GPs… When the deals are this big, can the private equity firms really generate returns that are better than would have been created by a company as a stand alone public entity?I have always had the perspective that returns to shareholders were a function of leverage (reducing cost of capital, having the impact of increasing returns on equity), and growth (growing cash flow and earnings at a rate the exceeds a companies cost of capital).With respect to leverage, don’t all firms have the option to increase leverage (as independent public companies) to repurchase shares, declare special dividends, etc? Why do they need an equity sponsor to do that? And regarding growth, these companies are so large that inherently they are harder to grow at an increased rate (law of large numbers).I guess I don’t get why the LPs stand for it or haven’t asked more question! s about the mega deals.I would be interested to see the returns of the GP vs. the returns of the LPs in these mega funds in terms of capital committed/at risk.”

*** David on PE collusion, as evidenced by an alleged reduction in competition for mega-deals: ”Where are the Corporates? It’s the financial buyers involved in these big deals.Are the PE firms just better?The number of exits by PE firms on public markets is also interesting. Bet it’s never been higher as the corporates are not buying right now. Are the deals too big for them?”

*** V on the NYMEX IPO: “On your comment about ‘underwriter foresight’ regarding the NYMEX pricing… Do you really believe that underwriters didn’t know this would happen? This is such an amazing game, because the company is the loser but the wealthy buyers at IPO are the winners. It’s hard for me to believe that these sophisticated underwriters were caught by surprise – I think they serve their buyers more than their clients.”

*** Finally, Eric on Second Life: “I share your surprise re: second life.However, your article made me recall making a couple bucks painting those little metal figures that my friends (read: we) used for Dungeons and Dragons.Exchange of real cash in real life for a service whose sole purpose was enhancement of a gaming experience? People pay real money for all kinds of leisure items whose ‘non leisure’ marginal added value is small or negative – aren’t Second Life assets just one type (albeit with very low capital costs for manufacture)?Isn’t all software ‘fake things’ when defined as implied in your article? The networking hook is interesting though. Don’t live in Atherton and eat breakfast at Bucks? No problem – meet a VC from your sofa in Bulgaria.”

New at More on the PE collusion lawsuit, including some factual inaccuracies in the filing; Jon Callaghan of True Ventures on The Problem with the Quick Bridge and our introductory Environmental column from Dennis Shelly of Arcadis. Also a few new job offerings in our Careers section…

Top Three

The Blackstone Group has agreed to acquire Chicago-based office building owner and manager Equity Office Properties Trust (NYSE: EOP) for $48.50 per share. The total deal is valued at approximately $36 billion, with acquisition financing to be led by Goldman Sachs, Bank of America and Bear Stearns. It is the largest leveraged buyout in history.

HCA Inc. (NYSE: HCA), a Nashville, Tenn.-based hospital company, has been acquired by Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity, HCA founder Dr. Thomas F. Frist, Jr. and HCA management. The total deal was valued at approximately $33 billion, including the assumption or repayment of approximately $11.7 billion of debt. HCA shareholders received $51 per share, and the shares are now delisted.

Newport Media Inc., a Lake Forrest, Calif.-based fabless semiconductor company supplying products to the mobile broadcast media market, has raised $30 million in Series C funding. DAG Ventures led the deal, and was joined by return backers Benchmark Capital, Global Catalyst Partners, Oak Investment Partners, Pinnacle Ventures and Venrock Associates. Newport Media has raised more than $66 million in total VC funding since its 2005 inception.

VC Deals

YouSendIt Inc., a Mountain View, Calif.-based provider of online file delivery solutions, has raised $4.7 million in Series A-2 funding. Return backers include Alloy Ventures, Cambrian Fund and Sevin Rosen Funds.

Solaicx, a Santa Clara, Calif.–based manufacturer of single-crystal silicon wafers for the solar photovoltaic industry, has raised $3 million from Applied Ventures.

Cambridge Devices, a Cambridge, Mass.-based medical device company focused on real-time pathology solutions, has raised $2.5 million in seed funding from Kodiak Venture Partners.

Skelta Software, a Bangalore, India-based provider of business process management workflow software, has raised $1.5 million in first-round funding from SIDBI Venture Capital Ltd.

DSM Venturing, the corporate VC arm of Royal DSM NV, has acquired a 10% stake in Micromuscle AB, a Sweden-based developer of electro-active polymers (EAP) technology for vascular applications. No financial terms were disclosed.

Buyout Deals

Seven Networks Ltd. (ASX: SEV) of Australia and Kohlberg Kravis Roberts & Co. have formed a joint venture to pursue media opportunities in Australia and New Zealand. Under terms of the agreement, KKR will pay around Au$735 million for a 50% stake in the venture, which also will own Seven’s existing television, magazines and online businesses. The joint venture also will hold around Au$2.5 billion in debt, with the ability to borrow another Au$350 million.

Vector Capital of San Francisco has agreed to acquire the Discovery Informatics business of Tripos Inc. (Nasdaq: TRPS) for approximately $25.6 million in cash. Tripos is a St. Louis-based provider of informatics and research technologies to the drug discovery market.

Cerberus, Lone Star Funds and BayernLB have been short-listed to bid for Austrian bank Bawag, according to AFX. The sale is expected to be worth at least Euro 2.5 billion.

Audax Group has acquired AAMP of America from ICV Capital Partners for an undisclosed amount. AAMP is a Clearwater, Fla.-based maker of 12-volt mobile audio after-market accessories.

EnCana Corp. (NYSE: ECA) has completed the sale of California-based natural gas storage operator Wild Goose Storage LLC for approximately $200 million to Niska Gas Storage US, a portfolio company of the Carlyle/Riverstone Global Energy and Power Funds.

PE-Backed IPOs

Saudi International Petrochemical Co. (Sipchem), a Saudi Arabia-based diversified petrochemicals company, has completed an IPO on the Saudi Tadawul stock exchange. The company had raised $85 million from the IDB Infrastructure Fund, with is managed by EMP Global.

This week’s IPO calendar includes expected pricings from Spirit Aerosystems Holdings Inc., Aercap Holdings NV and NACG Holdings Inc.

PE-Backed M&A

Neuro-Hitech Inc. (OTC BB: NHPI) has agreed to acquire Q-RNA Inc., a New York-based biotech company focused on conditions such as Alzheimer’s, epilepsy and Parkinson’s disease. The deal is valued at nearly $11 million in stock, plus an agreement whereby Q-RNA shareholders will commit at least $3.1 million to the combined company. Q-RNA has raised a funding from firms like Wheatley Partners, Double D Venture Fund and Durand Venture Associates.

National Paintball Supply Inc. of Sewell, N.J. has merged with fellow paintball company Pursuit Marketing Inc. of Des Plaines, Illinois. No financial terms were disclosed for the deal, which was backed by equity from Angelo, Gordon & Co.

Sewell, N.J. has merged with fellow paintball company Pursuit Marketing Inc. of Des Plaines, Illinois. No financial terms were disclosed for the deal, which was backed by equity from Angelo, Gordon & Co.

PE Exits

Johnson & Johnson (NYSE: JNJ) has agreed to acquire cardiovascular device company Conor Medsystems Inc. (Nasdaq: CONR) for approximately $1.4 billion. Conor went public in 2004, but backers like Highland Capital Partners and Easton Hunt Capital Partners remained minority shareholders.

Avaya Inc. (NYSE: AV) has acquired Traverse Networks Inc., a Fremont, Calif.-based developer of enterprise mobility solutions for unified communications, for $15 million. Traverse had raised over $14 million in VC funding since its 2001 inception, from firms like Foundation Capital, Labrador Ventures and Lightspeed Venture Partners.

Firm & Fund News

Accel-KKR of Menlo Park, Calif. has closed its second fund with at least $300 million in capital commitments, according to Buyouts Magazine. The new vehicle will focus primarily on technology buyouts, rather than its predecessor’s strategy of doing both venture and buyout deals. Accel-KKR was formed in 2000 by VC shop Accel Partners and buyout firm Kohlberg Kravis Roberts & Co.

GSC Acquisition Co., a Florham Park, N.J.-based blank check acquisition company formed by the senior management of GSC Partners (f.k.a. Greenwich Street Capital Partners), has filed for a $175 million IPO. It plans to trade on the AMEX, with Citigroup serving as lead underwriter.

Human Resources

Roger Hurwitz has left Apax Partners, where he was a partner focused on the enterprise software and technology-enabled services spaces. He joined the firm in 1999, before which he had been a vice president with GE Equity. No word yet on his future plans.

Paul Bagatelas has joined The Carlyle Group as a managing director for investor relations and senior executive officer of the firm’s new office in Dubai, United Arab Emirates. He previously was a director with Credit Suisse in Dubai, as team leader for special coverage in the Middle East.

Nobuyoshi Yamanaka, former president and CEO of Emerson Electric Japan and of GE Hitachi Lighting, has joined Bain Capital’s portfolio group as an operating partner. He also has been named chairman of Conlux, the Japanese subsidiary of Bain portfolio company MEI Conlux.

Jerry Bowerman, former vice president and COO of Electronic Arts Canada, has joined Sevin Rosen Funds as an entrepreneur-in-residence. He will work out of the firm’s Austin, Texas office, and will focus on opportunities in the user-generated content and consumer gaming markets.

Mark Kenderdine-Davies has been named general counsel and chief compliance officer of CDC Group PLC, a UK government-backed private equity fund-of-funds focused on the emerging markets. He previously served as legal counsel with Gartmore Investment Management.

Clearview Capital has added three professionals: Paul Caliento as a principal, who previously was with auditing and consulting firm Flackman, Goodman & Potter; Brad Simpson as controller, who previously was with Palmeri Fund Administrators and; Amanda Birnbaum as director of marketing, who previously was director of graphic design for Not Traditional Media Inc. Clearview also has promoted Matt Rumilly to vice president.

Dayna Grayson has joined North Bridge Venture Partners as a principal. She previously led new product development efforts at Blackbaud (Nasdaq: BLKB), a provider of software to nonprofit organizations.

Paul Stewart, a principal of private equity firm PS Capital Partners, has been elected to a one-year term as chairman of the Association for Corporate Growth (ACG). He succeeds Patrick Hurley, managing director of MidMarket Capital Advisors.