Many listed companies in the US are feeling more than just a little uneasy in their public market shoes. As more and more managers of public companies are craving private ownership, buyout shops are being presented with a big opportunity. David Snow explains the appeal of going private.
In the face of market gloom and world turmoil, buyout firms have much to be happy about. Increasingly, they find themselves the only players on Wall Street with any capital to invest. This puts them in a strong position vis-à-vis their target acquisitions.
Buyout firms have something else working to their favor that is not as openly discussed – the CEOs of many publicly traded companies hate being public. They despise being public. And they know that only private equity can free them from the depressing papershuffling of the listed life.
You'd think being the CEO of a publicly listed company would be something to be proud of – an honour, even. Certainly, this is what thousands of executives assumed as they took their corporations public during the 1990's IPO stampede. “It used to be that being a public company was great – it gave you bragging rights at the country club,” says Paul Schaye, a managing director at Chestnut Hill Partners, a New York investment bank and middle-market specialist. “Now, it's no fun. These guys are being forced to open up the kimono.”
The kimono opened a bit wider than most CEOs felt comfortable with upon the passage of the Sarbanes-Oxley Act of 2002, which President Bush signed into law last July. Sarbanes-Oxley was a response to corporate scandals like Enron and Worldcom, and was intended to give the public greater confidence in the stock market. The act greatly increases the requirements surrounding corporate reporting and disclosure and makes CEOs personally responsible for oversights. For example, CEOs and other “certifying officers” must now personally sign off on earnings reports. They face up to 20 years in prison for knowingly or willingly violating procedures.
The new requirements also keep companies in a perpetual state of disclosure. Public companies now must rapidly report any financial information as it becomes known to management – “real time.”
More regulations may follow that will make the job of a public company CEO less rewarding. The practice of lavishing stock options on senior executives has lately come under fire, and the Financial Accounting Standards Board is considering requiring corporations to treat these options as an expense, which would decrease earnings, and therefore force boards to be less generous. Until now, options have had a powerful effect on the preferences of senior executives – one buyout GP says a number of CEOs of target companies decided against going private because of their large options packages. If these packages shrink, so too will the appeal of being a public-company CEO.
Being public was never cheap, but now the expense and time devoted to reporting is becoming a mighty strain on smaller corporations, the managers of which are beginning to wonder what the value is of jumping through all those hoops. “I know one guy who runs a public company who told me, ‘I'm a public company – I'm all dressed up with no place to go,’” says a merger advisor.
The list of grievances goes on. Share prices, especially for mid- and small-sized public companies, are way down, and insiders know that most of these stocks will languish indefinitely. Now that equity research as a business has been severed from investment banking, research as a business will be less profitable and limited in scope. Therefore, the vast majority of public companies will receive little to no coverage, and this will keep investors away. Even small companies with strong business fundamentals do and will continue to have depressed shares. “There are a lot of good companies out there that have daily trading volume of only 150,000 shares,” says an investment banker. “Hello That's nothing. That constrains you in the financial markets.”
Having a depressed stock price means a CEO's currency for acquisition has little value. And in any case, public companies now are not rewarded for making moves intended to produce long-term growth. An investment banker recounts a meeting he had with a CEO: “He knew that the company needed to reposition itself or its business was going to suffer in the future. The company decided to make an acquisition and announced that, as a result, its revenue would likely be down for the next three quarters to a year. Well guess what? Their stock was at $15 and now it's down to $9.50. This is the perfect candidate for a buyout.”
These CEOs know that if they were free from public scrutiny and the rigors of public-company reporting, they would be better able to focus on long-term growth. “Once you become delisted, you're not running on a quarter-by-quarter basis anymore,” says Schaye. “It's a different mentality. You can say, ‘You know what? For the next year, we're not going to grow our top line.’”
Not surprisingly, private equity GPs know better than anyone the pain of public CEOs. Every participant in the middle market, for example, has heard the complaints. “I've recently had meetings with 12 public company CEOs and all 12 said, ‘Yeah, I really don't want to be public anymore. I hate it,’” says a partner at a buyout firm. “The public market is the most motivated seller in the US right now.”
The management buyout option now has a lot to offer these motivated sellers. Private equity firms famously do not focus on quarterby-quarter performance. They have the capital to pursue acquisitions, to think globally. They can also provide a harried public CEO a better avenue to growing personal wealth.
Lawyers are often asked for free legal advice at cocktail parties. Buyout guys now know how this feels as they are quizzed about MBOs by every public-company executive they bump into. These executives are eager to delist and they are increasingly aware that private equity offers their ticket to freedom. Don't be surprised to hear a new boast at the country club: “I run a private corporation.”
Deals & Exits
Warburg Pincus leads $260m oil & gas round
Warburg Pincus has added to its stable of energy sector portfolio companies, leading a $260m round of funding for oil and gas exploration startup Antero Resources Corp. Joining Warburg Pincus in the round are Yorktown Energy Partners V, Lehman Brothers Merchant Banking Group and the Antero Resources management team.
Antero has used a portion of the proceeds to make its first acquisition, a Mid-Continent property containing approximately 20bn cubic feet of proved reserves and more than 3m cubic feet per day of net production.
Morgan Stanley Capital buys energy unit
Morgan Stanley Capital Partners, the private equity division of Morgan Stanley, is to acquire ethanol manufacturer Williams Bio-Energy from natural gas company Williams for approximately $75m. Williams Bio-Energy, which employs 240 people, produces 135m gallons of ethanol per year. The company was sold to enable Williams to focus on its natural gas activities, raise cash, and reduce working capital expenses.
Tom Lee helps Evercore double down on American Media
Evercore Capital Partners teamed up with Thomas H. Lee Partners to recapitalise Evercore portfolio company American Media, Inc. in a transaction that values the media conglomerate at $1.5bn.
New York-based Evercore and Thomas H. Lee Partners will each fund approximately half of the $508m equity stake in the transaction. The recapitalisation is structured so that American Media's original investors in 1999, led by Evercore, will sell their stakes to the new investment group. Evercore used the transaction to cash out some of its prior investors and is reinvesting in the company with its latest fund.
“We think there is a lot of growth potential for the company, through acquisitions and organic growth,” Anthony DiNovi, managing director of Boston-based Thomas H. Lee Partners, said. “The company performed very well over the past few years and has been strong despite this environment. With a little wind at its back, we think it can perform even better.”
Citigroup, Teachers' Merchant Bank agree Worldspan deal
Citigroup Venture Capital Equity Partners and the Teachers' Merchant Bank, the private equity arm of the Ontario Teachers' Pension Plan, have agreed to purchase travel technology company Worldspan from its three airline owners, Delta, American, and Northwest, for an undisclosed sum.
Worldspan provides travel technology resources to travel agencies, e-commerce sites, corporations and other travel suppliers. Worldspan is the market leader in e-commerce for the travel industry, processing more than 50 per cent of all online travel agency bookings. The airlines formed the company in 1990.
Teachers' Merchant Bank also led the reorganisation of Maple Leaf Sports & Entertainment, the organisation that owns the Toronto Maple Leafs hockey franchise, the Toronto Raptors basketball franchise, and the Air Canada Centre.
JP Morgan Partners platform buys VSS units
JP Morgan Partners has acquired two publishing companies from New York-based VS&A Communications, the private equity arm of media merchant bank Veronis Suhler Stevenson, through its Ascend Media portfolio company. The two companies acquired are Atwood Publishing and GEM Communications. Atwood is a leading publisher of magazines and directories for the trade industry, while GEM publishes trade magazines and organises conferences and exhibitions for the gaming industry.
KPS buys Wire Rope assets for $50m
KPS Special Situations has agreed to acquire the assets of Wire Rope Corporation of America out of bankruptcy for approximately $50m. This will be the first deal from KPS Special Situations Fund II, which held a first closing for $175m late last year.
Wire Rope Corp. produces high carbon wire and wire rope products for the mining, oil and gas, construction and steel industries. The company has four manufacturing facilities and six distribution centers. The company filed for bankruptcy last May, when it listed more than $40m in debts and between $50m and $100m in assets. The company reported a $22 million operating loss in 2001.
Goldman Sachs, W Capital buy Tredegar interests
Goldman Sachs' GS Vintage Fund II acquired all of plastics and aluminum company Tredegar Corp.'s private equity partnership interests. At the same time, W Capital Partners, an independent private equity manager that has worked with GS Vintage funds in the acquisition of venture capital and private equity portfolios, acquired Tredegar's direct investment portfolio.
Tredegar, which manufactures plastic films and aluminum extrusions through its various subsidiaries, expects to receive $75m in cash after taxes. In 2001, Tredegar formed Perennial Ventures to manage both the company's new and old venture capital investments. Perennial Ventures is now disbanded and the status of the firm's principals is unclear.
Most of Tredegar's investments were in the life sciences, communications, and information technology industries.
Apollo buys Sylvan tutoring arm, shutters VC arm
Apollo Management is acquiring Sylvan Learning Systems' units in a deal that values the divisions at around $300m. Sylvan is also disbanding its venture unit, Sylvan Ventures, to which Apollo committed $100m in 2000. Apollo will acquire the tutoring units, which consist of Sylvan's retail and institutional tutoring businesses called Sylvan Learning Centers. Sylvan is also buying out Apollo's stake in Sylvan Ventures, which is now valued at $45m. Apollo's representation on Sylvan's board of directors will fall to one from two in accordance with the agreement.
Odyssey acquires CSFB portfolio company unit
Odyssey Investment Partners has agreed to acquire the specialty avionics group of CSFB Private Equity portfolio company DeCrane Aircraft for $140m. The specialty avionics group makes flight deck and cabin audio management systems, flight deck visual display and communication systems, and electrical contacts for military and aviation applications. DeCrane is selling the business to focus on its core market of cabin management and systems integration for the corporate jet market. DLJ Merchant Banking Partners II, a fund now part of CSFB Private Equity, acquired DeCrane in 1998 for approximately $173m.
CSFB, AIG acquire energy group in $306m buyout
CSFB Private Equity, the direct investment arm of Credit Suisse First Boston, and AIG Highstar Capital, a private equity fund sponsored by insurance giant AIG that invests in the power, transportation and environmental services industries, acquired a 50 per cent stake in Duke/UAE Ref-Fuel from Duke Energy for $306m.
“This investment in Duke/UAE Ref-Fuel will be an excellent addition to AIG Highstar's portfolio of energy infrastructure assets, which include power transmission and generation and natural gas storage and transportation,” said Christopher Lee, managing director of AIG Highstar.
MPM Capital sells HIV, hepatitis drug business
MPM Capital has agreed to sell its hepatitis and HIV treatment company Idenix to Novartis Pharma for up to $612m. Novartis will acquire 51 per cent of Idenix's stock for $255m at closing and could pay $357m more if Idenix's hepatitis drug candidates reach certain milestones.
Idenix, which is developing drugs to treat HIV and hepatitis, was originally funded by MPM Capital in 1998, when the firm committed $12m to the company, which was then called Novirio. MPM Capital invested an additional $12.5m in 1999, and participated in a $44m round in 2001 led by CSFB Private Equity. The company, which changed names to Idenix in 2002, filed for an IPO in April 2002, but it never got off the ground.
Carousel Capital acquires building products business
Carousel Capital has led the management buyout of hardwood stair parts and column manufacturer Visador Holding Corp. American Capital Strategies committed $10m to the deal.
Visador manufactures hardwood stair parts under the Coffman barnad name. The company offers more than 9,000 parts. Visador's column business, called Crown Column, makes synthetic and wood columns, porch posts and lamp posts used in construction, remodelling, and home repair. “We've been spending a lot of time looking at the building products industry generally,” Bill Hobbs, a partner at Carousel, said. “A lot of our investors came from that industry and helped us identify Visador as a leader in its niche.”
Graham Partners buys HB&G
Graham Partners has acquired housing products manufacturer HB&G Building Products. Merrill Lynch Capital led senior debt financing, which included Sovereign Bank. Subordinated debt was provided by RBC Leveraged Capital. HB&G generates approximately $70m in sales per year. The company manufacturers specialty millwork, primarily interior and exterior columns, porch posts and rails, and interior moldings. The company has averaged 20 per cent annual growth over the past five years. “HB&G operates in an industry niche we identified about a year ago,” Rob Newbold, a managing principal at Graham Partners, said. “We are actively looking for companies benefiting from a conversion trend – in this case, a shift from wood to synthetic materials.”
Funds & Buyside
Calpers discloses fund data
The investment committee of the California Public Employees Retirement System (CalPERS), the largest pension fund in the US, unanimously agreed to a model for disclosing private equity fund performance, including a web site dedicated to disclosing alternative investment information.
The Web site will display private equity fund performance data, including internal rates of return, cash invested, and cash returned. The site will also display a list of general partners to which the pension is committed, along with descriptions of strategies and links to those firms' web sites.
CalPERS said it doesn't intend to publish portfolio company information because doing so could be detrimental to performance of the companies.
Natural Gas Partners closes Fund VII on $600m
Texas-based energy specialist Natural Gas Partners closed its latest fund, Natural Gas Partners VII, on $600m. The fund had an original target of $450m. The firm's sixth fund closed on $370m in 1999.
Natural Gas Partners typically invests between $10m and $60m of equity in energy companies in North America. Since its founding in 1988, the firm has invested $935m in 62 companies and exited 35 investments, plus an additional two partial exits. The firm now has $1.6bn in capital under management.
Onex launches debut fund, targets $1.5bn
Canadian financial conglomerate Onex Corp. announced it is raising a $1.5bn private equity fund. The firm, which traditionally has raised co-investment capital, on a transaction-by-transaction basis, for most of its acquisitions, will commit $300m in foundation capital to the fund.
Onex will target large institutional investors, including pension funds in Canada, the US and Europe.
UTIMCO withholds performance data
The University of Texas Investment Management Co (Utimco), which manages roughly $14bn on behalf of the University of Texas System, has decided to withhold the latest quarterly return data for about half of its private equity investments.
In September, UTIMCO's nine-member board of directors voted unanimously to make publicly available detailed performance data, including valuation estimates and rates of return, on its roughly 130 private equity funds after the Houston Chronicle and several Texan state politicians objected to its policy of non-disclosure for private equity fund returns.
At the time, UTIMCO cited an opinion from then attorney general John Cornyn that the data was public and maintained it did not require the consent of the general partners to disclose the data performance data through its quarter ended August 31.
UTIMCO now argues Cornyn's ruling, on the grounds that a clause in his opinion stated it “must not be relied upon as a previous determination regarding any other records or any other circumstances,” was limited strictly to the return data up to August 31. UTIMCO has asked for legal clarification.
Longworth closes fund II on $115m
Boston-based early and expansion stage technology venture capital firm Longworth Venture Partners held a final close on $115m for its second fund, exceeding its $100m target.
Longworth invests in early and expansion stage technology companies, with a particular focus on enterprise application software, systems management solutions, information technology infrastructure, and related services. Portfolio companies include MCA Solutions, Thor Technologies, Roving Software, Softricity, Kaon Interactive, EnvoyWorldWide, and Dirig Software.
CIT Equity Investments spins out
Paul Laud and Colby Collier, founding managers of CIT Equity Investments and Venture Capital, the private equity arm they launched in 1990 on behalf of equipment leasing company CIT, have spun out to form Laud Collier & Co, an independent private equity firm that will target investments in middle market companies.
CIT and Laud Collier will share in any profits made by the firm, which will continue to operate out of CIT's Livingston, New Jersey-based headquarters.
Laud Collier will pursue new investments in middle market leveraged buyouts with annual revenues between $25m and $250m in the four major sectors on which the principals have focused the past 13 years: basic materials, business services, consumer products and transportation.
Sports pros launch middle market-focused Sorenson Capital
Fraser Bullock, former president and chief operating officer of the Salt Lake Olympic Organizing Committee, has teamed with Steve Young, a former quarterback with National Football League team the San Francisco 49ers, to launch a new middle market buyout firm called Sorenson Capital.
Sorenson Capital, based in Sandy, Utah, has raised $75m of a proposed $275m fund. The firm is named after Jim Sorenson, chief executive officer of Sorenson Media, whose family is an investor in the fund. The new firm will focus on buyout of companies with revenues between $50m and $100m in the Rocky Mountain region.
ILPA appoints executive director
The board of the Institutional Limited Partners Association (ILPA) appointed Arlett Tygesen, who works in the private equity funds group at the Ontario Municipal Employees Retirement System (OMERS), as executive director of ILPA. Tygesen will be responsible for leading key projects and programs and managing the organisation on a day-to-day basis. Her role will focus on ensuring the continuation of the strategic direction and the vision of the ILPA. She will split her time equally between OMERS and the ILPA.
Carlyle hires former XO CEO
Carlyle has appointed former XO Communications CEO and Forstmann Little partner Daniel Akerson a managing director. He will focus on buyout and venture investment opportunities in North America. Akerson served as XO's chairman and CEO from 1999 until this year. XO, which received commitments of up to $2bn from Forstmann Little beginning with an $850m investment in January 2000, filed for Chapter 11 bankruptcy protection in June 2002.
Former NY Comptroller McCall joins HealthPoint
H. Carl McCall, former comptroller of the State of New York, has joined HealthPoint as vice chairman and managing director. The New York-based firm was founded last September by John Foster to focus on the orthopaedic device industry. McCall will act as liaison to investors in the fund, as well as evaluating investment opportunities for the firm, advising investment banking clients, and contributing to the sound governance of companies in which HealthPoint invests.
HealthPoint expects to close its debut private equity fund on $200m in late spring. Foster founded investment advisory firm Foster Management Co., which has managed seven private equity funds, in 1972.
De Novo Ventures hires former Ioplex chief
De Novo Ventures named medical technology industry veteran Joe Mandato a director to the firm as its sixth professional. Mandato, who will focus on identifying new medical technology investments, joins the firm from Ioptex Research, where he served as president. He has also served as president of Origin MedSystems, A Company Orthodontics and Heart Rhythm Technologies.
De Novo Ventures invests in early stage life science companies, based primarily in the western US. The firm targets investments in the medical devices, biotechnology, pharmaceuticals, genomics and drug delivery sectors.
Radius Ventures names former Pfizer executive venture partner
Healthcare specialist Radius Ventures named George Milne, former executive vice president of global research and development at Pfizer, a venture partner to advise the firm's portfolio companies and identify new investment opportunities.
Milne was most recently executive vice president of Pfizer's global research and development group and president of the company's worldwide strategic and operations management before retiring from the company last year. He joined Pfizer in 1970 and became director of Pfizer's department of immunology and infectious diseases in 1981.
Bartlett sets up independent law firm
Former Morrison & Foerster senior partner Joseph Bartlett has set up an independent law office following his departure from the New York-based firm last month. Bartlett, editor of The Encyclopedia of Venture Capital, and founder chairman of VCExperts.com, a US website for entrepreneurs and professionals in the venture capital industry, will continue to advise on venture capital transactions.
Veronis Suhler Stevenson names three new partners
Media merchant bank Veronis Suhler Stevenson has added three new partners, Gerry Benford, Marco Sodi, and Scott Troeller, to the firm. The three will also continue to be active at the bank's private equity affiliate, New York-based VS&A Communications Partners. Benford and Troeller serve as general partners to the private equity division.
Catalyst appoints special venture partner
Terry Jones has joined General Catalyst Partners as a special venture partner, focusing on identifying new investment opportunities within the travel and leisure, transportation and e-commerce sectors.
Jones most recently served as the founder and chief executive officer of online travel service provider Travelocity.com.
Prior to his work at Travelocity.com, he spent 24 years at Sabre, where he served at the executive level in various roles, including president of decision technologies, vice president of applications development and vice president of product development, before concluding his career as chief information officer.
Blackstone hires ex-Treasury Secretary
The Blackstone Group announced that former US Treasury Secretary Paul O'Neill has agreed to act as special advisor to the firm, advising the firm's private equity funds' portfolio companies on operational and related issues and assisting the firm in analysing potential investment opportunities. “His political career is relevant, but it is secondary,” a source close to Blackstone said. “We are looking to him to bring his expertise as a CEO to bear on our portfolio companies, and in sourcing deals.”
O'Neill was sworn in as the 72nd Secretary of the Treasury on January 20, 2001 and resigned from the office on December 6 2002, the same day as Lawrence Lindsey, the White House's chief economic adviser. Prior to his political service, O'Neill was chairman and chief executive officer of Alcoa from 1987 to 1999, and retired as chairman at the end of 2000. Prior to joining Alcoa, O'Neill was president of International Paper Company from 1985 to 1987, where he was vice president from 1977 to 1985.
Steven Simonian quits Meritech for Gabriel Venture Partners
Gabriel Venture Partners has appointed Steven Simonian as chief financial officer and director of operations, hiring him away from late stage venture capital firm Meritech Capital Partners, where he served as chief financial officer. Prior to joining Meritech, Simonian held various finance positions, including three years at private medical device company Image Enhancement System, where he served as chief financial officer. He also served as the controller at early stage venture capital firm US Venture Partners.
California-based Gabriel Venture Partners invests in the communications and networking, internet, and information technology sectors. The firm closed its debut fund on $100m in March 2000.
Virginia Turezyn arrives at Constellation Ventures
Constellation Ventures, the venture capital arm of Bear Stearns Asset Management, has appointed Virginia Turezyn as managing director. Turezyn was the cofounder and managing director of Infinity Capital and its predecessor firm Information Technology Ventures, where she assisted in raising three venture capital funds. Prior to that she was with Morgan Stanley's Venture Capital Group, where she helped establish and build its West Coast technology presence and venture capital practice.
Constellation Ventures is an early to mid-stage venture capital firm with a media technology focus that includes the digital content, communications technologies and enterprise software sectors. The firm has $450m under management.