Vector Capital adds to drug development platform

Vector Capital is going from carve-out to add-on with portfolio company Tripos, combining the St. Louis-based provider of drug development software with a public company in an all-cash deal worth substantially more than its original investment.

In March 2007, the San Francisco-based buyout shop, acquired the assets of the discovery informatics business of then-public Tripos for $26.2 million. Now Vector Capital has agreed to acquire Pharsight Corp. for $5.50 per share, or $57 million.

Amish Mehta, one of Vector Capital’s three partners, says the payout for Pharsight amounts to $40 million after backing out the $17 million in cash the company has on the books. Mehta, who calls the deal a “natural” for the firm, says the all-cash structure of the transaction resulted mainly from two factors: The current financing environment and the attractiveness of the combination.

“Leverage is very difficult to come by,” Mehta says. “At the same time, valuations [in the tech sector] have come down a bit but not that significantly and not until recently.”

Mehta says that the elimination of public company costs was also a factor to getting the deal done.

“It’s gotten to the point that companies with less than $100 million in annual revenue really have no business being public,” he says, estimating that expenses related to disclosure and other responsibilities can run as high as $5 million per year.

The transaction is expected to close in the fourth quarter.

Vector Capital, which was spun out of Ziff Brothers Investment in 1997, is currently investing from Vector Capital IV, a $1.2 billion fund raised in 2007. —Michael Baron