peHUB Wire: Monday, November 16, 2009

Earlier this year, Connie wrote about how TL Ventures was in the midst of litigation with three of its former staffers, including ex-partner Bob Fabbio. At issue was more than $2.3 million in clawbacks that TL claims is owed by Fabbio, former managing director Stan Tims and former principal Stephen Andriole.

There is some dispute as to whether the clawbacks can even be requested before the funds are officially dissolved, but the larger issue is whether or not remaining TL Ventures partners used management fees to pay off part, or all, of their own clawback liabilities. As the trio’s attorney Cindy Olsen told me:

“I believe the evidence will show that certain partners… engaged in self-dealing by stashing away money for clawback instead of running TL Ventures in accordance with its investment strategies.”

The trio sued TL for an accounting of its management fees. TL countered by arguing that Fabbio, et all had previously signed away their rights to a c! ourt case, with arbitration as their only recourse.

All of this brings us up to the present, and an arbitration case set to begin on December 1. Fabbio’s attorneys have already deposed TL Ventures CFO Pam Strisofsky, but TL insisted that her deposition remain confidential (I called TL for comment, but received no reply).

What’s important to note, however, is that the arbitration will be limited to issues surrounding TL Ventures’ third fund, even though Fabbio’s original lawsuit also included a request for information on Fund IV. Once this arbitration ends, expect Fabbio to revive at least part of his original lawsuit (filed in Texas), plus possibly file a new suit in Delaware or Pennsylvania (where TL is based). In other words, arbitration will not be the end of this…

*** On Friday, I posted a list of the 10 largest VC-backed M&A exits of 2009. Not necessarily the best return multiples, mind you, but just the largest sales from a sale price perspective (pending deals were included). This is not an exact science, which is likely why a bunch of readers have emailed with some constructive criticism.

First, there is the issue of what to do with public companies that still have VC shareholders. Both Starent Networks (being bought by Cisco) and Data Domain (EMC) made my list, with the dollar value calculated by using the sale price multiplied by the number of shares still held by the VC firms. Seems fair, but one reader suggested that I should use the entire acquisition price, including the value of shares not held by VCs. Why? Because I used the entire sale price of private companies like Zappos and AdMob, even though neither company was 100% owned by their venture capitalists. This is fairly valid, which may mean I do so! me chart tweaking later today (but don’t hold me to it).

Second, two readers didn’t like that I excluded earn-outs from my calculations. Playfish, for example, didn’t make the Top 10 because its $400 million from Electronic Arts only includes a $300 million up-front payment. I’ll stand by this decision, since many VCs tell me that they view earn-outs as a nice little bonus down the line, but nothing that they feel even semi-confident that they can bank on (particularly in life sciences, which is where most earn-outs lie).

Finally, there is the issue of deals paid for in stock — or partially in stock — rather than in cash. Shouldn’t I have valued the stock at today’s trading price, rather than the stock value when the deal was transacted? On this I plead ambivalence.

*** Why did the ghost of 2005-era Doc Rivers choose to possess Bill Belichick?

*** Shameless Plug: Venture Capital Journal is hosting a cleantech panel discussion and networking event in Los Angeles. Kind of like what we did in Boston a couple of weeks back. It takes place on the evening of December 3, in the Century Park offices of law firm McGuireWoods. Get full agenda and ticket info by going here.

Top Three

Metro-Goldwyn-Mayer said that it is exploring a sale of the company, in part due to looming debt payments. The storied Hollywood studio was purchased for $4.85 billion (including $2b of assumed debt) in 2005 by a group that included Providence Equity Partners, DLJ Merchant Banking Partners, Quadrangle Group, Sony Corp. and Comcast Corp.

Focus Financial Partners, a New York-based wealth management group, has raised $50 million in new private equity funding. Polaris Venture Partners led the round with a $35 million investment, while return backer Summit Partners provided the other $15 million.

TPG Capital is offering to cut the size of its financial fund, TPG Financial Partners, from $6 billion to just $2.5 billion.

VC Deals

Fate Therapeutics, a La Jolla, Calif.-based stem cell biotech company focused on cell fate control, has raised $30 million in Series B funding. OVP Venture Partnersled the round, and was joined by fellow return backers ARCH Venture Partners, Polaris Venture Partners and Venrock. The company previously raised $12 million.

Sezmi, a Belmont, Calif.-based developer of a set-top box that combines traditional television content with on-demand movies and Internet video, has raised $25 million in third-round funding. An unnamed strategic investors was joined by return backers Morgenthaler Partners, Index Ventures, Legend Ventures, Omni Capital and TD Fund. The company previously raised around $53 million, including a $33 million infusion last year at a post-money valuation of approximately $170 million.

Millennial Media, a Baltimore-based provider of mobile advertising solutions, has raised $16 million in Series C funding. New Enterprise Associates led the round, and was joined by return backers Bessemer Venture Partners, Columbia Capital and Charles River Ventures.

Zenph Sound Innovations, a Raleigh, N.C.-based developer of “software and algorithms to transform music into data in order to understand and re-perform music in novel ways,” has raised $10.7 million in new VC funding. Intersouth Partners led the round, and was joined by Capitol Broadcasting Company.

EverNote Corp., a Sunnyvale, Calif.-based provider of information capturing technologies, has! raised $10 million in third-round funding. Morgenthaler Ventu res led the deal, and was joined by return backers DoCoMo Capital and Troika Dialog.

Arrowsight Inc., a Mt. Kisco, N.Y.-based provider of third-party remote video auditing technology and services, has raised $6.75 million in new VC funding led by Oak Street Investments., a provider of Web-based bookkeeping services for small businesses, has raised $5 million in second-round funding, according to VentureWire. Sequoia Capital led the deal, and was joined by return backers Shasta Ventures, First Round Capital and SoftTech VC.

Ortho Kinematics, an Austin, Texas-based spine diagnostics startup, has raised $3.5 million in new VC funding. Backers include PTV Sciences, the State of Texas Emerging Technology Fund and Gatebridge Investments.

Buyouts Deals

Bain Capital has agreed to buy a majority stake in Japanese telemarketer Bellsystem24 from Citigroup, for 93.5 billion yen ($1 billion). Rival bidders had included Permira and the tandem of Blackstone Group and CVC Capital Partners.

Citigroup recently rejected a proposal by Terra Firma Capital Partners to restructure the debt of music group EMI, according to the Wall Street Journal. The proposal would have had Terra Firma invest around £1 billion into EMI in exchange for Citigroup waving a similar proportion of its £2.6 billion of EMI loans.

Hellman & Friedman reportedly has agreed to acquire Web Reservations International, a Dublin-based operator of hostel booking website, for more t! han €200 million. Sellers include Summit Partners, which held around a 20% stake.

Investcorp has agreed to acquire a 20% stake in Gulf Cryo, a Kuwait-based manufacturer of industrial, medical and specialty gases. No financial terms were disclosed. Gulf Cryo was founded by, and is stillowned by, the Al Huneidi family. It has annual sales of approximately $1.5 billion.

Numericable, a French cable television operator, has increased the interest margin on a loan amendment request. The move would enable Numericable tobuy back debt and raise senior secured notes. Company backers include Carlyle Group, Cinven and Altice.

Pharos Capital Group has acquired Rush Tracking Systems, a Kansas City-based RFID business! process consulting and systems integration company. No financial term s were disclosed.

Simmons Co. has filed for Chapter 11 bankruptcy protection, as part of a prepackaged arrangement whereby the mattress maker would be sold to Ares Management and Ontario Teachers’ Pension Plan. Simmons had been owned by THL Partners.

PE-Backed IPOs

China Forestry Holdings Group, a forestry plantation operator backed by The Carlyle Group and Partners Group, plans to raise up to $203 million via an IPO in Hong Kong next month.

PE-Backed M&A

Bioniche Pharma, an injectable drugmakerowned by Roundtable Healthcare Partners, has acquired Duraclon (clonidine hydrochloride injection) and Methadone Hydrochloride Injection USP from Xanodyne Pharmaceuticals Inc. No financial terms were disclosed. Xanodyne has raised over $230 million in VC funding, from firms like AIG Investments, Aisling Capital, Blue Chip Venture Co., Essex Woodlands Health Ventures, HealthCare Ventures, MPM Capital andUnion Springs.

PE Exits

Champ Private Equity, the Australian affiliate of Castle Harlan, has sold United Malt Holdings to GrainCorp Ltd. (AX: GNC). The deal was valued at US$655 million.

Google has acquired Gizmo5, a San Diego-based provider of calling software for mobile phones and computers. No financial terms were disclosed. Gizmo5 had raised around $6 million in VC funding from firms like Dawntreader Ventures.

Firms & Funds

Caisse de depot et placement du Quebec announced a multibillion-dollar borrowing plan to refinance the pension fund’s short-term debt.

Human Resources

Blackstone Group president and COO Tony James sold $67.5 million of his stake in Blackstone, or around 8.5% of his family’s holdings, in order to finance his contributions to various Blackstone funds.

James Rhee has joined GB Merchant Partners as a managing director of the 1903 Equity Fund, which invests in middle-market retail and consumer products companies. He previously was with J.W. Childs Associates.

Altira Group has promoted both Sean Ebert and Cory Steffek from senior associates to principals. Ebert joined the energy-focused firm in March 2008 from Booz Allen Hamilton, while joined the following month after receiving his MBA from the Kellogg School of Management.