PE Week Wire: Thurs., April 26, 2007

The sun is shining, the hand-me-down VW is on repair blocks (at least the Pontiac was always cheap to fix) and we have over 80 firms participating in our upcoming Internship Drive (further info at end of column). In other words, it’s time for some Thursday Throwback…

Most of the week’s email came yesterday, in response to my column on the SEIU private equity report. Specifically, many you took issue with my use of the term “basic fairness” – in sympathy to SEIU’s argument that portfolio company worker’s should share in a company’s success. So here’s a sampling:

Loretta: “Basic fairness? I’d be surprised if I was the only reader thinking that such an approach would be out of alignment with the philosophies underlying our capitalist system and a step in the direction of a socialist approach. Is this really what’s needed? Do we think our economy will prosper if we create a climate that no longer rewards innovators well enough for them to continue to innovate? How will ‘the workers’ make a living then? It’s misguided to think that others’ prosperity will increase if you tie the hands of those who create wealth.”

George: “You old closet lefty. Unions are declining in America because the reason for their genesis—the excesses of the Robber Baron era—is no longer relevant. The competition now is global, and union work rules won’t help one US worker keep his or her job. Sorry to be a wet blanket, but I can’t think of one unionized industry that has prospered in the past 30 years, with the exception of the public school monopoly, which is in desperate need of competition. SEIU is merely trying to inject politics into the buyout mix.”

Jordi: “Employees sharing the profit without sharing the risk seems like a skewed proposition. Basically, SEIU is saying that they want the additional upside without exposure to the additional downside of an equity investment (their maximum downside is loss of employment, regardless of whether the buyout happens). Plus, they want the new owner to disclose the business plan so as to be better able to identify where the sensitivities in the deal lie, i.e. so they know what measures to choose first to protest against / try block in order to hold management to ransom. nice one. A fairly large section of the employee base in our firm are offered the opportunity to co-invest in every investment. very few below senior management ever do so. Enough said.”

David: “The growing disparity between the top 0.1% of the U.S. and everybody else looks more and more like Latin America. Historically, U.S. unions have been a far less radical counter-balance than in Europe (let alone the ‘alternative’ of the ‘free-market’ capitalism of our new-found friends in China). SEIU has grown in size, power and respect due to the innovative approach of its leadership. Rather than simply calling them out as the boogey man Socialists, it behooves us to consider their analysis more seriously. Kudos to Dan for spending the time to provide both an intelligent perspective of the SEIU proposal, and for vetting it for the rest of us in the PE community.”

Jonas: “You’re probably getting slammed for the term ‘basic fairness,’ but the word that most stuck me in your column was ‘cocoon.’ I think that a lot of us in the higher levels of private equity (or maybe of any industry) begin hearing our own arguments repeated so many times that we lose the ability to objectively consider and respond to outsiders (like SEIU). I’m not saying I agree with all of SEIU’s points (nor do you, it seems), but some of the backlash I’ve already heard today is exactly the type of ‘they just don’t understand’ carping that you cited. Maybe the problem isn’t so much that they are too outside the realm to understand, but rather that we are to close to it.”

It’s worth noting that the SEIU report came up multiple times last night at a Ropes & Gray private equity forum I attended, which included senior partners from such firms as Thomas H. Lee Partners, Bain Capital, Berkshire Partners and Thomas H. Lee Partners. No harsh slamming of it, but more reluctant acceptance of the notion that politics is going to play a more significant role in private equity going forward. As for the “basic fairness” comment, I stand by it. To me, providing employees with equity upside generally would result in greater alignment under a capitalist model – not less alignment.

As for the issue of employee risk in exchange for reward, I offer a few thoughts (and note that I raised that very issue in the SEIU conference call). First, employees always assume risk in any company that goes south – in terms of losing employment. And there is a subset of PE-backed portfolio workers who make so little already, that the idea of them buying in is impractical (can’t invest if you can’t make ends meet). But, in general, I accept the notion that employees should buy in if they want the potential to get paid out. Again, greater alignment of interests.

However, it is also worth noting – as was said repeatedly at last night’s event – that private equity investors themselves have spent the past few years minimizing risk while maximizing rewards. Examples include increased leverage, leverage securitization, LP co-invest and KKR’s apparent ability to get an equity bridge on First Data, while getting to keep any carry on the bridge for itself. So while I generally accept the risk-reward premise, I’d also say that those in glass houses might not want to throw stones.

*** For those who were unable to attend, I’ve posted video of last week’s debate between Kevin Conway of CD&R and Andrew Ross Sorkin of The New York Times. The visual quality isn’t always the best, but the audio is clear.

*** Finally, we do have over 80 firms participating in our latest Internship Drive. I will be posting the opportunties either later today or tomorrow, in the MBA Forum section of peHUB (I’ll also pull down all the old ones). An email will go out to all MBA Forum members when the listings are up. Also, some MBA Forum members have asked me about getting access to the peHUB search archives. It costs $124 per year (sign up here), but we are offering special discounts to MBA programs that buy bulk memberships. If your program is interested, please have someone let me know…

Top Three

KKR and GS Capital Partners have agreed to acquire Harman International Industries Inc. (NYSE: HAR) for approximately $8 billion. Harman stockholders would have the option to either receive $120 per share in cash, or to exchange some of their shares for shares in the newly-formed private company. The total number of Harman shares that can elect to participate in the stock swap is approximately 8.3 million, or $1 billion (27% equity position, following the transaction). Leverage is being provided by Bank of America Securities LLC, Credit Suisse, Goldman Sachs and Lehman Brothers. Bear Stearns is advising Harman on the sale. Harman is a manufacturer of audio products and electronic systems for the automotive, consumer and professional markets.

Orexigen Therapeutics Inc., a San Diego-based neuroscience company focused on the treatment of obesity, priced seven million common shares at $12 per share, for an IPO take of approximately $84 million. It had originally filed to sell six million shares at between $11 and $13 per share. Orezigen will trade on the Nasdaq under ticker symbol OREX, while Merrill Lynch and JPMorgan served as co-lead underwriters. The company has raised around $76 million in total VC funding from firms like Domain Associates (21.3% pre-IPO stake), Kleiner Perkins (20%), Sofinnova Ventures (15%), Scale Venture Partners (14.8%), Montreaux Equity Partners (7.4%), Morgenthaler Partners (5.9%), MPM BioEquities and Wasatch Advisors.

MPM Capital has formed a partnership with Reliance Life Sciences of India, in order to help grow India’s life sciences industry. RLS has become a limited partner in MPM’s latest fund, which will allocate a portion of its capital for Indian companies. In addition, MPM will provide office space for a RLS investment professional dedicated to the MPM/RLS partnership, and will explore the potential for a new India-only seed fund.

VC Deals

Ellacoya Networks Inc., a Merrimack, N.H.-based provider of broadband service optimization solutions to carriers, has raised $13 million in Series E funding. Return backers included Atlas Ventures, BCE Capital, Canaan Partners, Lightspeed Venture Partners and Presidio Venture Partners. The company has raised over $190 million in total VC funding since its 1999 inception, including a venture recap in 2003.

Silicon Hive has spun out of the Philips Technology Incubator, with $10 million in first-round funding. Philips will retain a minority position, with new backers including New Venture Partners and TVM Capital. Silicon Hive is a Dutch provider of programmable processor IP cores for the semiconductor and consumer electronics industry.

VideoIQ, a video analytics company, has spun out from GE Security, with $8 million in Series A funding from Atlas Venture and Matrix Partners. As part of the deal, VideoIQ also acquired the core products and patent-pending technology associated with the video analytics business at GE Security.

Ponte Solutions Inc., a Mountain View, Calif.-based DFM solutions company, has raised $7.5 million in Series B funding. Mayfield led the deal, and was joined by return backer U.S. Venture Partners. It has raised $17 million in total VC funding.

Garlik Ltd., a UK-based provider of personal online identity management and security, has raised £6 million in Series B funding from return backers 3i Group and Doughty Hanson Technology Ventures.

Allegiance Inc., a Salt Lake City-based provider of enterprise feedback management solutions, has raised $5.7 million in new VC funding. Allegis Capital led the deal, and was joined by Nippon Venture Capital and return backer TPP Capital Advisors.

Cellerant Therapeutics Inc., a Palo Alto, Calif.-based developer of blood-forming stem cell-based therapies for cancer, genetic blood disorders and autoimmune diseases, has secured $4.4 million of a $5 million Series B round, according to a regulatory filing. Backers include Camelot Ventures and MPM Capital.

Adconion Media Group, a Munich-based online advertising network, has raised an undisclosed amount of Series A funding from Wellington Partners.

Razz Inc. has launched as a San Francisco–based content service provider of audio entertainment for mobile content and social network users. The company was formed in 2002, and has raised an undisclosed amount of VC funding from Mayfield, Cardinal Venture Capital, Garage Technology Ventures and Greenpark Capital.

TechForward Inc., a Los Angeles-based provider of consumer electronics trade-in plans, has raised an undisclosed amount of Series A funding led by First Round Capital.

Buyout Deals

Natural Gas Partners has agreed to acquire the domestic power production and power development business units of MDU Resources Group Inc. (NYSE: MDU), in a transaction valued at $636 million. The businesses being acquired include Centennial Power Inc. and Colorado Energy Management LLC. NGP has teamed on the deal with energy industry executive Paul Prager, who will serve as the carved-out company’s CEO. Barclays and Goldman Sachs are providing leveraged financing.

Silver Lake Partners has agreed to acquire Westcom Corp. from One Equity Partners, according to LBOWire. No financial terms were reported. Westcom is a provider of secure phone lines for financial traders and brokers.

Kinderhook Industries has acquired Inc. from Inc., for a purchase price of $17 million. is a Park City, Utah-based operator of a travel website for skiers. The deal represents the first acquisition for Castles Media Co., a new Kinderhook-sponsored acquisition platform run by former Primedia executive Julian Castelli.

Wendy’s International Inc. (NYSE: WEN) has formed a special committee of independent directors to explore strategic options, including a possible sale of the company. The fast food company has a market cap of approximately $3 billion, and has been under increasing pressure from shareholders like hedge fund manager Nelson Peltz.

Marwit Capital disclosed terms of its recent acquisition of Best Vinyl LLC, an American Fork, Utah-based installer of plastic fences. The deal included an initial $25.5 million investment, with $25 million in growth capital reserves.

Lincoln National Corp. (NYSE: LNC) is in the process of retaining bankers to explore a possible sale of its broadcast and media business, according to Dow Jones. Such a deal could be valued at around $1.5 billion.

Alcoa Inc. (NYSE: AA) said that it may put its packaging and consumer business up for sale. The move sent Alcoa stock up more than 5%, in part because the divestitures could make Alcoa a more attractive buyout candidate.

Eastman Kodak Co. (NYSE: EK) shares rose nearly 9% yesterday, on widespread rumors that the company is being eyed by a private equity firm.

National Truck Protection Co., a Carlstadt, N.J.-based provider of heavy-duty truck inspection and warranties, has raised an undisclosed amount of funding from Palladian Capital Partners (equity) and Praesidian Capital Investors (secured senior notes). Company management also participated on the equity tranche.

PE-Backed IPOs

Edenor, the largest electricity distribution company in Argentina, priced around 15.16 American depository shares at $17 per share ($16-$18 range), for a U.S. IPO take of approximately $258 million. It will trade on the NYSE under ticker symbol EDN, while Citigroup and JPMorgan served as co-lead underwriters. Shareholders include New Energy Ventures, which is affiliated with a private equity fund controlled by Grupo Dolphin.

Dolan Media Co., a Minneapolis-based provider of business information and professional services to the legal, financial and real estate markets, has filed for a $150 million IPO. It plans to trade on the Nasdaq under ticker symbol DM, with Goldman Sachs and Merrill Lynch serving as co-lead underwriters. Shareholders include Abry Partners, Caisse de depot et placement du Quebec and BG Media Investors.

Insulet Corp., a Bedford, Mass.-based maker of wireless glucose pumps for diabetics, has set its proposed IPO terms to 6.7 million common shares to be offered at between $14 and $16 per share. It plans to trade on the Nasdaq under ticker symbol PODD, with JP Morgan and Merrill Lynch serving as co-lead underwriters. Insulet has raised $120.2 million in total VC funding since its 2000 inception, from firms like Prism VentureWorks, Versant Ventures, Alta Partners, The Kaufmann Fund, MedVenture Associates, Pequot Capital, Oakwood Medical Investors, Orbimed Advisors, Red Abbey Venture Partners, SV Life Sciences, SightLine Partners and TIAA-CREF.

PE-Backed M&A

Bally Total Fitness (NYSE: BFT) has agreed to sell 16 Toronto-based health clubs to Extreme Fitness Inc., a portfolio company of Falconhead Capital. The deal is valued at approximately Cdn$19.6 million.

PE Exits

3i Group has sold its position in British commercial insurance broker Smart & Cook to AXA UK, for an undisclosed amount. 3i originally invested in Smart & Cook in March 2004, and later provided additional capital to support acquisitions.

Firms & Funds

The Pennsylvania State Employees’ Retirement Board has approved commitments to the following funds: Battery Ventures VIII ($40m), SB Energy Partners I ($25m), Asia Alternatives Capital Partner ($50m), Highland Consumer Fund ($25m) and Energy Spectrum Partners V ($30m). It also has extended interview invitations to CID Greater China Fund II, Founders Fund II and W Capital Fund II.

European Capital has opened a Frankfurt office, which will focus on mezzanine opportunities. It is the firm’s third European office – following London and Paris, and will be led by managing director Robert von Finckenstein.

Blackbird Partners, an Oak Brook, Ill.-based executive search firm, has changed its name to TillmanCarlson.

Human Resources

Bryan Stolle has joined Mohr Davidow Ventures as a partner. He is the co-founder of former MDV portfolio company Agile Software.

Jai Hakhu has joined Golden Gate Capital as a senior advisor. He most recently was a corporate vice president and general manager at Intel Corp., and previously served as a vice president at both Rockwell International and at Varian Semiconductors.

Norwest Mezzanine Partners has promoted William Dietz to partner. He joined the firm in January 2001 as an associate, and was promoted to principal in August 2005.

CIT Group has named Tim Eichenlaub senior managing director, and head of equity sponsors and investment banks. It also named Mitchell Drucker as senior managing director, and head of hedge funds and restructuring advisors. Eichenlaub previously served as head of CIT Sponsor Finance, while Drucker was co-head of CIT Business Capital.

Kevin Park has joined Marwit Capital as an associate, effective June 18. He previously was an analyst with both Mesirow Financial and Robertson Stephens.

Third Avenue Management has promoted Yang Lie to Director of Research, a newly created position. Lie is senior portfolio manager for Third Avenue’s private and institutional advisory business, is currently responsible for overseeing approximately $2 billion in client assets.

The Mid-Atlantic Venture Association has elected two new members to its board: Don Rainey, general partner with Intersouth Partners, and Sean Stone, senior vice president with SVB Financial Group. Each will serve as three-year term. Michael Murray, managing director with Deutsche Bank, is leaving the board after having served for the past five years.