Maj Nov2010

NOVEMBER 2010 THE OFFICIAL PUBLICATION OF
THEMIDDLEMARKET.COM
Q&A: Pantheons Susan Long McAndrews
Infrastructure Model Gains Clarity
IPO Backlog Becomes Target Stockpile
PLUS
Bottleneck
Private
equity
rms race
to the
exits to
secure
realizations
before the
end of
the year
001_MAJNov10 1 10/8/2010 10:24:37 PM
Contents
November 2010 | Volume 45 | Number 11
Watercooler
6 Private equity overhang casts large
shadow; narcissism is a good quality for
a seller; dealmakers see the Gulf re-
opening for business; plus other news
M&A pros are talking about.
Outlook
12 Breakup Fees: Creating a Market
14 Consolidation: A Pricing Panacea?
LBO Watch
16 IPO Backlog Attracts Attention
18 Other Peoples Equity
20 Infrastructure Play Gains Clarity
26 Q&A: Align in the Sand
Pantheons Susan Long
McAndrews says LPs are insisting on
transparency and alignment before they
back new funds
34 Guideposts for a Carveout
Acquiring a corporate subsidiary or
business unit can present as many
challenges as opportunities
Canada Supplement
30 Tracking the Eagle
A healthy banking system, a stable
dollar, and global ambitions are driving
Canadian buyers to cross the border
32 Turning M&A into R&D
As Canadas Research in Motion
competes with Apple, it is turning to
deals to fll in technology holes
37 People
48 M&A Data
Association for
Corporate Growth
4 Whos Who
5 Letter to Members
40 Te Pulse
42 Community Commentary
Cover Story
Bottleneck
Sponsors race to the ex-
its in an efort to secure
realizations before the
end of the year
22
C
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v
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I
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November 2010 MERGERS & ACQUISITIONS
001_MAJNov10 1 10/8/2010 8:35:10 PM
Inside Word
Time to
Decompress?
A
s of early October, the deal market seemed to be as healthy as it has been at
any point over the past two years. Tis should be good news for the long
haul, as deals tend to beget more deals.
Te transactions that made headlines in August, September and October were
eforts that have been in the works since January, February and March. Tat means
theres a whole host of Johnny Come Latelys watching all of this wondering why
they never received their e-vite. Dont bother checking that old AOL account, ei-
ther.
What will be interesting to see this time around is if the rush of activity wit-
nessed in the summer and early fall has legs beyond the close of the year. Tats
because for the frst time since people started talking about the expiration of the
Bush era tax cuts, sellers actually showed some urgency to beat the deadline.
(If dealmakers are anything like me after a deadline, there is a decompression
period that involves Oban, cheddar pretzel Combos, and reruns of the Wire, pref-
erably season IV.)
Barring the unforeseen, I think this recent run of activity has legs, though. Te
race to beat the possible tax hikes wasnt the sole driver in these deals. I dont even see
it as a primary driver. Deals are happening because the lending markets improved;
sponsors need to alternately post some realizations and put capital to work; and
strategics have to fgure out a way to show top-line growth. If these factors werent
in play, investors would sufer through the tax hit and wait until they were.
In this issue, Danielle Fugazy covers the run of exits from private equity for
Decembers cover story. Anyone who thought the asset class would wither up and
die only has to look at Huron Capitals 18x return from earlier this year.
Also, Tamika Cody explored how and if M&A can solve the riddle of price ero-
sion coming out of the downturn. Either way, companies appear willing to try.
And Jonathan Marino sizes up the huge IPO backlog for potential acquisition
candidates.
Tanks for reading. If you have any thoughts or comments, please dont hesitate
to reach out.
Ken MacFadyen
ken.macfadyen@sourcemedia.com
Editor Ken MacFadyen
ken.macfadyen@sourcemedia.com
Senior Reporters Jonathan Marino
jonathan.marino@sourcemedia.com
Tamika Cody
tamika.cody@sourcemedia.com
Contributing Editors Danielle Fugazy
danielle.fugazy@sourcemedia.com
Carol Clouse
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Aleksandrs Rozens
Richard Kellerhals
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November 2010 Volume 45, Number 11
MERGERS & ACQUISITIONS November 2010
002_MAJNov10 1 10/12/2010 10:33:26 AM
ACG Board 0f Directors
Chairman*
Michael A. Carr
Partner, BAC Investments, LLC
ACG Los Angeles
Term expires 2011
Vice Chairman*
Andrew W. Rice
Senior Vice President, The Jordan Company
ACG Chicago
Term expires 2011
President & Chief Executive Offcer*
Gary A. LaBranche, CAE
ACG Headquarters
Chairman of Finance*
Cliff Braly
Partner, Deloitte Tax LLP
ACG Dallas/Fort Worth
Term expires 2011
Secretary
Tom Walton
Managing Director, Hanley, Hammill, Thomas
ACG Wisconsin
Term expires 2011
Chairman of InterGrowth 2011
Jack Helms
Chairman, Lazard Middle Market
ACG Minnesota
Term expires 2011
Chairman of InterGrowth 2012
Doug Tatum
CEO, The Co-Investment Partnership LLC
ACG Atlanta
Term expires 2012
Immediate Past Chairman
Dennis J. White
Senior Counsel, McDermott, Will & Emery LLP
ACG Boston
Term expires 2011
Chapter Representative Directors
Tracy Albert*
Managing Director, Houlihan Lokey Howard & Zukin
ACG Orange County
Term expires 2011
Dan Amadori
President, Lamerac Financial Corp.
ACG Toronto
Term expires 2011
Spencer J. Brown
President, Spencer J. Brown & Associates
ACG Portland
Term expires 2012
Vanessa Brown Claiborne
President, Chaffe & Associates
ACG Louisiana
Term expires 2012
Richard P. Jaffe*
Partner, Ballard Spahr LLP
ACG Philadelphia
Term expires 2012
John Kerschen
Managing Director, The Charter Group
ACG Western Michigan
Term expires 2012
Charles Morton
Partner, Venable LLP
ACG Maryland
Term expires 2011
Wendy Neal*
ACG Cleveland
Term expires 2011
Clifford R. Pearl
Of Counsel, Hensley Kim & Holzer LLC
ACG Denver
Term expires 2011
Ashley Rountree
Managing Director, C.W. Downer & Company
ACG France
Term expires 2012
Tom Tullidge
Managing Director, Cary Street Partners
ACG Richmond
Term expires 2012
Directors At Large
Les Alexander
Senior Vice President, Advantage Capital Partners
ACG Louisiana
Term expires 2011
Erik Dykema
Principal, Lineage Capital LLC
ACG Boston
Term expires 2012
Ed Fisher
Managing Partner, SouthPointe Ventures
ACG Atlanta
Term expires 2012
Michael Gibbons
President, Brown Gibbons Lang & Co.
ACG Cleveland
Term expires 2011
Patti Gillenwater
CEO, Elinvar
ACG Raleigh Durham
Term expires 2013
Penny Hulbert
Managing Director, Links Financial
ACG Tampa Bay
Term expires 2012
Stuart Johnson
Partner, Barnes & Thornburg, LLP
ACG Atlanta
Term expires 2011
Cory Mims
Managing Director, ICV Capital Partners
ACG New York
Term expires 2013
Stephen V. Prostor
Director, Citi Private Bank
ACG New York
Term expires 2013
* Member of the Executive Committee
ACG Honorary Directors
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Alan B. Gelband
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Contributors
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WHOS WHO
Association for Corporate Growth
71 S. Wacker Drive, Suite 2760
Chicago, IL 60606
ACG Membership: 877-358-2220
www.acg.org
004_MAJNov10 1 10/12/2010 10:33:42 AM
InterGrowth Countdown Begins
R
egistration for InterGrowth
2011
is now open. InterGrowth brings to-
gether the leading middle-market
M&A and corporate development profession-
als under one roof for three days of intense
networking and powerful content. We hope
that you will join nearly 2,000 of your peers
and colleagues at the Manchester Grand
Hyatt in San Diego, California March 2123,
2010, for what promises to be the best Inter-
Growth yet.
Headlining this years conference is retired
four-star Army general, Stanley A. McChrystal.
General McChrystal will share his thoughts
regarding leadership during challenging
times. Additionally, attendees will fnd that
this years programming has been enhanced
to provide insights and knowledge unique to
this event. The frst day (Tuesday, March 22)
will offer breakout sessions focused on macro
topics designed to encourage conversation on
issues impacting our industry and society as a
whole. Day two (Wednesday, March 23) will
feature dedicated program tracks focused
on such things as senior PE frm leadership,
corporate growth, closely held and family
businesses and core M&A topics. Whether
you are an InterGrowth veteran or frst-time
attendee, this enhanced programming should
not be missed.
Did you know that over 95 percent of Inter-
Growth attendees reported making a valu-
able business connection at last years con-
ference? Based on this powerful metric, this
years InterGrowth will include more open net-
working time, such as the InterGrowth open-
ing reception
which will
take place
aboard the
historic USS
Midway air-
craft carrier. Located a short walk from the
conference hotel, the USS Midway allows
attendees to experience the carriers history
and aircraft up close and personal, while en-
joying an evening of food, fun and business
connections.
The annual ACG DealSource
and ACG
Capital Connection
events will take place

on March 22 and 23, respectively. Last years
ACG Capital Connection featured 150 PEGs
and capital providers, representing over $42
billion in total investment capital. Tables are
still available for both events and interested
groups can fnd more information online at
www.acg.org.
As mentioned in last months letter, ACG
members are participating in more cross-bor-
der deals. With this in mind, ACG has added
AsiaGrowth to this years event on Thursday,
March 24. AsiaGrowth is a one-day seminar
focusing on dealmaking in Asia and will in-
clude discussions specifc to China, India,
Vietnam and Russia. Extend your stay and ex-
pand your business opportunities by attending
this new program. An additional registration
fee is required for this special program.
InterGrowth is the only multi-day inter-
national gathering of the global ACG mem-
bership. Dont miss ACGs signature event
and its enhanced programming. Early-bird
registration ends on January 14visit
www.acg.org for the latest program informa-
tion and to register today.
We look forward to seeing you in San
Diego in March!
Gary A. LaBranche, CAE
President & CEO
President & CEO
Michael A. Carr
Chairman
Gary A. LaBranche and Michael A. Carr
AsiaGrowth was added to the three-day event, focusing on dealmaking in China, India,
Vietnam and Russia
LETTER TO MEMBERS
Headlining this years conference is retired
four-star Army general, Stanley A. McChrystal.
005_MAJNov10 2 10/8/2010 8:35:30 PM
Te Narcissist Premium
A study explores the impact of CEO divas in
dealmaking
A
chological characteristics of chief executives and how it impacts M&A.
For instance, narcissism on the part of buy-side CEOs often trans
lates into a shorter period between the initial indications of interest and
also have some properties which are desirable in CEOs, the authors
wrote.
Watercooler
PE Overhang Soars to $485B
Only $85 billion is attributed to
mid-market funds
A
ccording to PitchBook Datas fall benchmarking report,
private equitys capital overhang continues to grow, with
current estimates pegging the amount
of dry powder available to US buyout shops
at $485 billion.
Te fgure, up from the $400 billion re-
ported by PitchBook last year, signals that
fundraising has outpaced new deal activity.
While the overhang will continue to im-
pact fundraisers, PitchBook documented
that new commitments to the asset class are
trending higher, as fundraising jumped from $21 billion in the
frst quarter of this year to $33 billion in the second quarter.
Tose sums are still well of of quarterly peaks witnessed in
2007 and 2008, climbing as high as $105 billion.
Te sizable overhang can be a bit misleading for smaller shops.
Te bulk of dry powder, roughly $400 billion, comes from funds
sized $1 billion or larger. Te overhang from middle market
funds, meanwhile, accounts for roughly 20% of the total.
With that said, many of the large-market shops, such as
Blackstone Group, Carlyle Group and Madison Dearborn have
dipped their toes in the smaller deal realm
in the absence of large-market opportuni-
ties. Carlyle even launched a new initiative
targeting the middle market in September,
bringing in Rodney Cohen from Pegasus
Capital to oversee the efort.
Te amount of dry powder shouldnt im-
ply that private equity frms are necessarily
frantic to put the capital to work. Roughly
$425 billion of the $485 billion sum is from funds that closed
over the past three years, leaving only around $60 billion of
capital with funds older than four years that are likely nearing
the end of their investment periods.
Hospira Exec Caught Skimming
A controller from a recently acquired
company traded with borrowed company
funds
T
here are many of reasons acquirers look to move fast
when it comes to post-merger integration; they can now
add crime prevention to that list.
Te Securities and Exchange Commission charged Paul
Beckwith with skimming money from Hospira, Inc. Beckwith
was the controller of Hospira subsidiary Teradoc, which was
acquired by Hospira late last year.
Te scam, according to an SEC complaint, involved Beck-
with transferring large sums of mon-
ey from Teradocs operating ac-
count, trading stock with the funds,
and then returning the money to the
companys balance sheet by the end
of the same month. Beckwith con-
tinued the scheme even after Tera-
doc was acquired, and more recently
stopped repaying the funds as he in-
curred trading losses.
Te SEC pointed out that Hospira lacked efective over-
sight and monitoring of Teradocs books since it has not
fully integrated Teradocs fnancial accounting system into its
own.
Hospira, its worth noting, has had its
hands full in terms of integration. Te
company acquired Teradoc last Decem-
ber for $63.3 million. Since then, it has
secured two other deals in March and
April -- buying Orchids generic inject-
ables business and executing a successful
tender ofer for Javelin Pharmaceuticals.
There isnt one business today that
couldnt be put out of business tomorrow
by the introduction of new regulations.
Michael Milken, speaking at ACG Los Angeles 2010
Business Conference.
POLITE CONVERSATION
In the September issue of Mergers & Acquisitions, the magazine
explored the the impact of the ILPAs Private Equity Principles a year
after their release. Recently, the Institutional Limited Partner Asso
ciation followed up with plans to capitalize on the momentum of the
principles, with plans to rollout a new set of guidelines for fnancial
reporting standards.
Te Holy Grail for private equity investors, aside from actual re
turns, seems to be fnding a boilerplate method that would standard
ize fnancial reporting. Te NVCA issued a set of valuation guide
lines 20 years ago, followed by subsequent eforts from the likes of
PEIGG, AIMR and other groups in the decade that followed.
Te ILPAs ultimate goal, according to a press release, is to drive
consistency, accuracy and expediency in reporting, which will help
create more transparency for investors. By the end of November,
the ILPA will have new templates ready covering capital calls, distri
bution notices and portfolio company quarterly reports. According
FIipping Through the Archives
006_MAJNov10 1 10/8/2010 8:35:38 PM
Te Narcissist Premium
A study explores the impact of CEO divas in
dealmaking
A
new research paper could have dealmakers monitoring the use
of personal pronouns by executives in negotiations. Te study,
CEO Narcissism and the Takeover Process, explores the psy-
chological characteristics of chief executives and how it impacts M&A.
For instance, narcissism on the part of buy-side CEOs often trans-
lates into a shorter period between the initial indications of interest and
the deals close. Narcissists on the sell-side, tend to
fetch higher premiums, while buy-side narcissists
are more likely to initiate a transaction.
Te authors -- including UCLA professor Rich-
ard Roll -- pored over more than 1,700 transcripts
of CEO speech involving deals between 2002
and 2006. Narcissism scores were determined by
calculating the proportion of frst person singular
pronouns to total frst person pronouns. Te ef-
fort yielded a sample of 137 deals.
Te authors were careful to note that narcis-
sism is an ambivalent concept. While it is gen-
erally considered to be an ego-pathology, it may
also have some properties which are desirable in CEOs, the authors
wrote.
Novembers web exclusives, found at www.
TheMiddleMarket.com. Readers can also
follow Mergers & Acquisitions on Twitter @
themiddlemarket.com.
Summer Love
The rush in M&A in July and August was driven
in part by tax changes; can dealmakers maintain
the pace, or will dealfow
start to recede as the year
comes to a close?
Investors Still Waiting
for Covenant Upside
Many had thought deal
terms would become
friendly in the aftermath
of the crisis, but the pro-
cess appears to be taking
longer than expected.
THEMIDDLEMARKET.COM
Te sizable overhang can be a bit misleading for smaller shops.
Te bulk of dry powder, roughly $400 billion, comes from funds
sized $1 billion or larger. Te overhang from middle market
funds, meanwhile, accounts for roughly 20% of the total.
With that said, many of the large-market shops, such as
Blackstone Group, Carlyle Group and Madison Dearborn have
dipped their toes in the smaller deal realm
in the absence of large-market opportuni-
ties. Carlyle even launched a new initiative
targeting the middle market in September,
bringing in Rodney Cohen from Pegasus
Te amount of dry powder shouldnt im-
ply that private equity frms are necessarily
frantic to put the capital to work. Roughly
$425 billion of the $485 billion sum is from funds that closed
over the past three years, leaving only around $60 billion of
capital with funds older than four years that are likely nearing
Te SEC pointed out that Hospira lacked efective over-
sight and monitoring of Teradocs books since it has not
fully integrated Teradocs fnancial accounting system into its
Hospira, its worth noting, has had its
hands full in terms of integration. Te
company acquired Teradoc last Decem-
ber for $63.3 million. Since then, it has
secured two other deals in March and
April -- buying Orchids generic inject-
ables business and executing a successful
tender ofer for Javelin Pharmaceuticals.
In the September issue of Mergers & Acquisitions, the magazine
explored the the impact of the ILPAs Private Equity Principles a year
after their release. Recently, the Institutional Limited Partner Asso-
ciation followed up with plans to capitalize on the momentum of the
principles, with plans to rollout a new set of guidelines for fnancial
reporting standards.
Te Holy Grail for private equity investors, aside from actual re-
turns, seems to be fnding a boilerplate method that would standard-
ize fnancial reporting. Te NVCA issued a set of valuation guide-
lines 20 years ago, followed by subsequent eforts from the likes of
PEIGG, AIMR and other groups in the decade that followed.
Te ILPAs ultimate goal, according to a press release, is to drive
consistency, accuracy and expediency in reporting, which will help
create more transparency for investors. By the end of November,
the ILPA will have new templates ready covering capital calls, distri-
bution notices and portfolio company quarterly reports. According
to the release, the ILPA worked with a
number of sponsors in drafting the new
templates.
Since last September, when the ILPA
unveiled its Private Equity Principles,
135 organizations have endorsed the
efort, while new funds seem to refect
the ILPAs eforts. Te fact that the re-
porting guidelines arent economic in
scope should make it an easier pill for GPs to
swallow.
Following the initial rollout, the ILPA does have other reporting
initiatives in mind. Kathy Jeramaz-Larson, executive director for the
ILPA, cites that ultimately the association is looking to streamline
the whole process and is currently working with GPs to test the
templates and apply the feedback.
FIipping Through the Archives
007_MAJNov10 2 10/8/2010 8:35:59 PM
Sale eforts follow recent divestitures from
the voice and internet services company
O
series of deals.
Te announcement follows earlier divestitures of certain as
sets. One Communications unloaded its minority stake in fber
optic development company Fibertech through a sale to private
equity frm Court Square Partners this summer. And in July, the
company sold its FiberNet assets to NTELOS for $170 million
in cash. Sale proceeds went to helping the company pay down
its debt.
Barnes & Noble Auction On
Following Burkles unsuccessful bid for board seats,
the book giant is moving ahead with its sale process
I
shareholders recognize the important protections of [the companys] rights
plan.
things, a deteriorating balance sheet and extraneous factors, alluding to
the fght with Burkle. Moreover, even as Barnes & Noble stakes its future in
digital, the analysts wrote that the company will fnd it increasingly difcult
to compete in the eReader market, as it becomes more commoditized.
Watercooler
TOMORROWS DEALS
RFID specialist PositiveID Corp., two years
after being spun out, is angling to acquire
its former parent
I
n a story arc stolen from Star Wars, PositiveID, two years af-
ter being divested by Digital Angel Corp., sought
to acquire its former parent through an unsolic-
ited, non-binding $17 million bid in the last week of
September. Digital Angel, a maker of animal ID and
emergency identifcation products, rejected the ofer
as inadequate.
Digital Angel unloaded its stake in VeriChip
Corp. two years ago for roughly $1.6 million in cash.
Scott Silvermans R&R Consulting Partners was the
buyer of the assets, which focus on human implant-
able RFID devices -- a technology that also sounds
like a product of George Lucas imagination. Silverman had
previously headed VeriChip as CEO during Digital Angels
ownership. After regaining control, he merged the assets with
credit monitoring business Steel Vault Corp. and renamed the
business PositiveID.
Digital Angel CEO Joe Grillo referred back to the decision
to divest VeriChip in brushing aside PositiveIDs bid, saying
they unloaded the unit due to lack of synergies between the
businesses. He added that the Digital Angel already held the
right to use PositiveIDs patents.
Digital Angels stock price has fallen more than 90% over
the past three years, a point PositiveID made in its public fl-
ings. Both companies currently trade on the Nasdaq, although
PositiveID received a non-com-
pliance notice earlier in Septem-
ber, while Digital Angel, in June,
received a de-listing notice.
Te unsolicited bid didnt
immediately translate into ne-
gotiations, but Digital Angel did
begin eforts to hire a bank and
said it would consider strategic
alternatives.
PositiveID, in an earlier fl-
ing, suggested it was prepared to commence an exchange
ofer to acquire the company. Following Digital Angels
rejection, however, PositiveID withdrew its ofer, stating that
it would begin new discussions once an advisor was formally
appointed.
GoDaddy In Play
Te domain-name company taps Qatalyst
Partners as adviser
G
oDaddy.com, which counts Danica Patrick and Chad
Johnson among its spokespeople, is a bit of a throw-
back when it comes to the internet and advertising. It
might be of little surprise, then, that the internet domain reg-
istration company chose to market itself for a sale at the start
of the football season and as Nascars sprint for the chase kicks
of.
According to a story in the Wall Street Journal, bidding for
the company could reach as high as $1 billion. Te Journal also
reported that Frank Quattrones Qatalyst Partners was tapped to
run the auction process.
Bob Parsons founded the Scottscale, Ariz.-based GoDaddy
more than 13 years ago and currently serves as CEO.
Media reports have speculated that private equity would be
a likely destination for GoDaddy.com. Strategics, however, have
also been active in recent months. Web.com Group, in August,
acquired Vector Capital portfolio company Register.com in a
$135 million deal.
Former Subsidiary Targets
Digital Angel
Columbia Ventures One
Communications on the Block
008_MAJNov10 3 10/8/2010 8:35:54 PM
Sale eforts follow recent divestitures from
the voice and internet services company
O
ne Communications is weighing its options, tapping
Blackstone to advise the company on prospective stra-
tegic alternatives. Te process could lead to one or a
series of deals.
Te announcement follows earlier divestitures of certain as-
sets. One Communications unloaded its minority stake in fber
optic development company Fibertech through a sale to private
equity frm Court Square Partners this summer. And in July, the
company sold its FiberNet assets to NTELOS for $170 million
in cash. Sale proceeds went to helping the company pay down
its debt.
Private equity frm Columbia Ventures Corporation (CVC)
owns 50% of One Communications.
Te frm frst acquired CTC Communications out of bank-
ruptcy in 2003 and then merged the company with Conversent
Communications and Choice One Communications three years
later to create one the larger local exchange carriers (CLEC) in
the US.
CTC, dealmakers may remember, got into trouble following
an investment in the company from Boston private equity frms
Bain Capital and Tomas H. Lee Partners. Te company went
bankrupt a few years later, leading creditors to claim that for-
mer head, Robert Fabbricatore, used company funds to main-
tain a lavish lifestyle.
Columbia Ventures, though, was able to pick up the com-
pany for $44 million out of bankruptcy.
Te company, which today is headed by CEO Kenneth Pe-
terson, Jr., did not return calls seeking comment by press time.
Barnes & Noble Auction On
Following Burkles unsuccessful bid for board seats,
the book giant is moving ahead with its sale process
I
n a heated proxy contest, Barnes & Noble managed to fend of Ron
Burkle who was looking to pick up seats on the companys board of
directors. Len Riggio, in a statement, billed the vote as evidence that
shareholders recognize the important protections of [the companys] rights
plan.
Burkle, in statement, downplayed the vote, cit-
ing that the win of the Riggios slate was due to the
insurmountable voting advantage of the founder.
Patricia Higgins, who chairs Barnes & Nobles
special committee, said the company would be con-
sidering full range of options, insisting that Yu-
caipa is welcome to make a bid.
Lazard is advising the company on the sale.
Despite the sale eforts, analysts remain cau-
tious. Bank of America Merrill Lynch analysts is-
sued a downbeat research note, citing, among other
things, a deteriorating balance sheet and extraneous factors, alluding to
the fght with Burkle. Moreover, even as Barnes & Noble stakes its future in
digital, the analysts wrote that the company will fnd it increasingly difcult
to compete in the eReader market, as it becomes more commoditized.
In Play
Others seeking buyers
>> Harvest Natural Resources Inc.
>> White Birch Paper Co.
>> Balboa Insurance Group, Inc.
>> Ultimate Escapes Inc.
>> Tompson Publishing Group Inc.
>> Urban Brands Inc.
>> Ally Financial Inc.
>> Long Island Bus
>> Sentinel Renewable Energies SC
>> Novell Inc - Linux Assets
>> SCO Group - Unix Business
Digital Angel CEO Joe Grillo referred back to the decision
to divest VeriChip in brushing aside PositiveIDs bid, saying
they unloaded the unit due to lack of synergies between the
businesses. He added that the Digital Angel already held the
Digital Angels stock price has fallen more than 90% over
the past three years, a point PositiveID made in its public fl-
ings. Both companies currently trade on the Nasdaq, although
PositiveID received a non-com-
pliance notice earlier in Septem-
ber, while Digital Angel, in June,
received a de-listing notice.
Te unsolicited bid didnt
immediately translate into ne-
gotiations, but Digital Angel did
begin eforts to hire a bank and
said it would consider strategic
PositiveID, in an earlier fl-
ing, suggested it was prepared to commence an exchange
ofer to acquire the company. Following Digital Angels
rejection, however, PositiveID withdrew its ofer, stating that
it would begin new discussions once an advisor was formally
Media reports have speculated that private equity would be
a likely destination for GoDaddy.com. Strategics, however, have
also been active in recent months. Web.com Group, in August,
acquired Vector Capital portfolio company Register.com in a
Columbia Ventures One
Communications on the Block
009_MAJNov10 4 10/8/2010 8:36:19 PM
SCs Direct Investment Plan Revisited
Te South Carolina Investment Commission hopes
to emulate the Canadian pensions approach to PE;
there are still some hurdles to cross
I
investment dollars. South Carolina, meanwhile, is looking to take it one step
further. Te states investment commission greenlighted a proposal to cre
ate an independent entity to manage direct private equity investments from
Sanford further stated that he has real concerns about what appears to
be the Commissions rushed approach to adopt the proposal. Given the
large of amount of money that could be invested--almost $9 billion--its es
sential that this proposal be fully explained and vetted before the Commis
sion adopts it.
In an email, Ben Fox, a spokesperson for the Governor, told sister pub
lication Investment Management Weekly that Sanfords ofce believes that
it is vital that the Retirement Investment Commission come before the
Board and explain the rationale behind the plan.
Pensions in Canada, such as the Ontario Teachers Pension Plan and the
Caisse de dpt, have historically focused on direct investing. Such eforts,
though, can carry more risk and require more resources. It can also create
political issues. Canadian Pension Plan Investment Board, for instance, tran
sitioned to focus on a direct investment strategy. When the pension plan
sufered signifcant losses last year, the compensation of the pensions fund
managers became a political issue. Still, underscoring its faith in the model,
the CPPIB continues to be one of the more active buyers in the market. On
the last day of September, the pension completed its $5 billion buyout of
Tompkins plc alongside Onex Corp.
Despite his initial vote for the proposal, treasurer Chellis joined Sanford
in asking that the plan be put on hold because lack of detail and public dis
closure has led to much confusion. Previously, he said his vote was centered
on the lower fee concept, the AP reported.
Watercooler
BELTWAY MONITOR
Gulf of Mexico Back in Business?
Riverstone joint venture with Ridgewood
Energy comes on the same day the White
House hints the moratorium could be lifted
O
n the same day the Department of the Interior an-
nounced new rules designed to improve drilling safe-
ty, Riverstone Holdings made a bet that the drilling
moratorium in the Gulf of Mexico would soon be lifted.
Te frm announced plans to make a strategic investment
backing a series of deepwater oil exploration projects in
the Gulf alongside Ridgewood Energy, which is manag-
ing the venture.
Te news comes amid increasing speculation that the
moratorium will in fact be lifted early. In September, the
Department of the Interior unveiled new rules, impos-
ing tougher requirements on things such as well design,
cementing practices, blowout preventers and employee
training. Te drilling reforms arrive fve months after the
Deepwater Horizon oil spill that led the Obama Admin-
istration to impose the standstill on drilling.
Te drafting of the regulations, however, can be viewed in
two lights. In the immediate term, it means activity can soon
resume; in the longer term the costs of ofshore drilling are sure
to rise, a factor that could spur future dealmaking.
Te drilling safety rule, in addition to prescribing the proper
casing practices and strengthening oversight mechanisms to shut
of the fow of oil or gas, requires operators to secure indepen-
dent reviews of well design, construction and fow intervention
mechanisms. Te workplace safety rule, meanwhile, promises
additional reforms, such as independent third-party verifcation
of operators safety and environmental management system
programs.
White House press secretary Robert Gibbs, according to a
transcript of a press briefng, suggested that the new drilling
rules moves the Admin-
istration closer to lifting
the moratorium. Te
report, from the Bureau
of Ocean Energy Man-
agement, is a big step
forward in getting this
process back online,
Gibbs said.
While new drilling
has been halted since the
start of the summer, in-
vestors have been active
picking up leases. According to an article in Mother Jones, after
President Obama announced the moratorium, the government
cleared 400 new lease sales in the Gulf.
Te new venture between Riverstone and Ridgewood has
already acquired material positions in over 20 leases, and has
fve defned prospects lined up for drilling next year.
Small Biz Bill Becomes Law
Beltway observers are still more focused on
whether the Bush-era tax cuts are allowed
to expire
A
s the federal government moves to monetize its TARP
investments, its focus on small business is ramping up.
Specifcally, in the last week of September, Congress
cleared a new efort, Te Small Business Jobs Act, aimed at
stabilizing the market and stimulating job growth. President
Barack Obama signed it into law on September 27.
A $30 billion credit facility for community banks, backed by
the Treasury, is designed to goose lending conditions, while the
muscle of the Small Business Administration is being augment-
ed through the expansion of the SBAs loan limits. Investors
were also targeted through the legislation, as a provision was put
in place for the balance of 2010 that will eliminate all capital
gains taxes on key small businesses as long as the investments
are held for fve years or longer.
Regarding the SBA program, the caps on both 7(a) and 504
loans were permanently escalated to $5 million from $2 mil-
lion, while manufacturing related loans were bumped up to
$5.5 million from $4 million. Moreover, SBA Express loans
were temporarily boosted to $1 million from $350,000.
Other components of the bill included an initiative designed
to augment state programs providing credit to small businesses,
on top of multiple tax cuts, 16 in all, meant to spur invest-
ment.
10 MERGERS & ACQUISITIONS November 2010
010_MAJNov10 5 10/8/2010 8:36:13 PM
SCs Direct Investment Plan Revisited
Te South Carolina Investment Commission hopes
to emulate the Canadian pensions approach to PE;
there are still some hurdles to cross
I
n October, Mergers & Acquisitions reported that pensions were increas-
ingly looking for co-investment opportunities from PE frms -- an ef-
fort designed to help cut fees and give limiteds more control of their
investment dollars. South Carolina, meanwhile, is looking to take it one step
further. Te states investment commission greenlighted a proposal to cre-
ate an independent entity to manage direct private equity investments from
the retirement system. After the proposals
unanimous approval, however, local of-
cials sought to put the breaks on the ef-
fort.
Governor Mark Sanford sent a letter
to Commission Chairman Allen Gillespie
on Sept. 21, before the vote, asking that it
refrain from approving the proposal in its
upcoming meetingwithout briefng the
Budget and Control Board and receiving
further input from other interest parties.
Sanford further stated that he has real concerns about what appears to
be the Commissions rushed approach to adopt the proposal. Given the
large of amount of money that could be invested--almost $9 billion--its es-
sential that this proposal be fully explained and vetted before the Commis-
sion adopts it.
In an email, Ben Fox, a spokesperson for the Governor, told sister pub-
lication Investment Management Weekly that Sanfords ofce believes that
it is vital that the Retirement Investment Commission come before the
Board and explain the rationale behind the plan.
Pensions in Canada, such as the Ontario Teachers Pension Plan and the
Caisse de dpt, have historically focused on direct investing. Such eforts,
though, can carry more risk and require more resources. It can also create
political issues. Canadian Pension Plan Investment Board, for instance, tran-
sitioned to focus on a direct investment strategy. When the pension plan
sufered signifcant losses last year, the compensation of the pensions fund
managers became a political issue. Still, underscoring its faith in the model,
the CPPIB continues to be one of the more active buyers in the market. On
the last day of September, the pension completed its $5 billion buyout of
Tompkins plc alongside Onex Corp.
Despite his initial vote for the proposal, treasurer Chellis joined Sanford
in asking that the plan be put on hold because lack of detail and public dis-
closure has led to much confusion. Previously, he said his vote was centered
on the lower fee concept, the AP reported.
Michael Giardiana
Obama to Rubenstein:
Tanks but No Tanks
Te Carlyle chief doesnt feel
all that welcome in the halls
of Congress
W
hether its the unrest over sun-
setting capital gains breaks or
the failure of the government
to re-hinge the markets, the perception
remains that the Obama administration
is unfriendly to business. At ACG Los
Angeles September business conference,
Carlyle Groups David Rubenstein relayed
an anecdote from last fall, suggesting that
the administration -- if it isnt unfriendly
-- at least shows poor taste at times in its
dealings with business.
Rubenstein, in recent years, has been
making news collecting historical docu-
ments. His most publicized purchase is a
copy of the Magna Carta. His least publi-
cized investment was the acquisition of a
rare copy of the emancipation proclama-
tion, signed by President Lincoln. When he
bought the document, Rubenstein ofered
to loan it to a seemingly
grateful White House.
An event was planned
and arrangements were
made, until someone
with the presidents ear
decided that politically,
a gift from David Ru-
benstein probably isnt
something that would
poll well.
So they said that it came from the
Smithsonian, Rubenstein told the
crowd.
Rubenstein didnt come out and say
the administration is anti-business as oth-
ers have done. A few weeks later, however,
he reportedly conceded at a Dow Jones
conference that he feels more welcome in
China than in the halls of Congress.
of the fow of oil or gas, requires operators to secure indepen-
dent reviews of well design, construction and fow intervention
mechanisms. Te workplace safety rule, meanwhile, promises
additional reforms, such as independent third-party verifcation
of operators safety and environmental management system
White House press secretary Robert Gibbs, according to a
transcript of a press briefng, suggested that the new drilling
rules moves the Admin-
istration closer to lifting
the moratorium. Te
report, from the Bureau
of Ocean Energy Man-
agement, is a big step
forward in getting this
process back online,
While new drilling
has been halted since the
start of the summer, in-
vestors have been active
picking up leases. According to an article in Mother Jones, after
President Obama announced the moratorium, the government
Te new venture between Riverstone and Ridgewood has
already acquired material positions in over 20 leases, and has
ed through the expansion of the SBAs loan limits. Investors
were also targeted through the legislation, as a provision was put
in place for the balance of 2010 that will eliminate all capital
gains taxes on key small businesses as long as the investments
Regarding the SBA program, the caps on both 7(a) and 504
loans were permanently escalated to $5 million from $2 mil-
lion, while manufacturing related loans were bumped up to
$5.5 million from $4 million. Moreover, SBA Express loans
Other components of the bill included an initiative designed
to augment state programs providing credit to small businesses,
on top of multiple tax cuts, 16 in all, meant to spur invest-
November 2010 MERGERS & ACQUISITIONS 11
011_MAJNov10 6 10/8/2010 8:36:24 PM
Outlook
Creating a Market
A
perception exists in M&A that termination
fees are granted at the expense of the share-
holders. Some of the more exciting bidding
contests in recent months, however, provide case
studies on the value of break-up fees and seem to
signal that when applied appropriately, everyone
shareholders and losing bidders included can walk
away a winner.
Take the bidding for 3Par. When its initial deal
with Dell was announced on August 16, a $53.5
million termination fee and matching rights were
negotiated by the buyer to guard against topping of-
fers to its $18-per-share, $1.13 billion bid. Less than
a week later, Hewlett-Packard responded with a $24
per share ofer. Before Dell submitted a counter, the
company padded its breakup fee to $72 million. Dell
could have matched HP, but included a seemingly
nominal $0.30-per-share premium that covered the
value of the improved termination fee.
HP still followed up with a $27-per-share ofer
that same day. Dell matched and within a few hours
HP threw a haymaker in the form of a $30-per-share,
$1.88 billion bid. In the frst week of September,
HP topped its own ofer, increasing its bid to $33 a
share. A proxy fling from 3Par shows that Dell had
approached the board with a revised bid of $32 a
share. Te improved ofer came with the caveat of an
increased break-up fee, upped to $92 million, and a
proposed commercial relationship, which would have
been assumed by the successor company and included
fxed pricing and other terms. Te 3Par board deemed
Dells fnal ofer unacceptable, although HP still
came in with a topping bid.
While its impossible to get into the minds of the
parties involved, outwardly, 3Par and its advisors ap-
peared masterful in giving Dell just enough to keep
the company active in the bidding, without imposing
barriers deemed too high by HP. One lawyer, speak-
ing anonymously, describes that break-up fees are
provisions that bidders desperately want included
if theyre going to put in the time and expense to ex-
plore a transaction. Oftentimes, you wont be able
to get them to the table to negotiate without it, the
lawyer cites, adding that size matters.
Keeping Dell incentivized, while it cost sharehold-
ers $72 million of the ultimate $2.1 billion purchase
price, may have added as much as a 37% premium to
the deal, amounting to around $500 million, from
HPs frst counter ofer, or just under a $1 billion
from Dells original ofer.
Still, critics like to disparage break-up fees as sup-
pressing the potential for competing bids. When 3M
agreed to acquire Cogent, a $28 million break-up fee
was challenged in court as dissuading competing of-
fers. Te fght for Dollar Trifty Automotive Group
yielded similar charges, as a class action lawsuit
claimed the deck was stacked for Hertz by providing
matching rights and a break-up fee equal to 5.25% of
the purchase price.
To be sure, the makeup of termination fees and
other deal protections can have varying afects, and as
the source mentioned, size does matter.
Tere is a sense of whats a normal range, adds
Brian Duwe, a partner with Skadden Arps Slate
Meagher & Flom in Chicago. He adds that three
to four percent of the overall deal value is a defen-
sible number. Of course, even this can be up for
interpretation. In the 3M/Cogent deal, a sharehold-
er lawsuit challenged that while the fee represented
3% of the equity value, Cogents strong cash posi-
tion meant that the fee represented nearly 7% of the
enterprise value. Te court, however, sided with the
defendants.
Not everyone sees the incentive value of break-
up fees. Bulldog Investors principal Philip Gold-
stein, for instance, concedes, You have to get paid
for being a stalking horse... as a shareholder, I would
Jonathan Marino
Recent deaIs highIight how breakup fees, against con-
ventionaI wisdom, can drive sharehoIder vaIue higher
You won't be
able to get
them to the
table to negoti-
ate without it.
BREAK-UP FEES continued on page 46

012_MAJNov10 1 10/8/2010 8:36:33 PM
M&A thesis], says Geis. Clearly what Oracle is trying to do is to
present companies with a bundle of services that locks them in.
Tis, Geis adds, gives Oracle the market strength to dictate the prices
charged for servicing the various hardware and software combina
tions.
Acquisitions of Peoplesoft and Sun Microsystems may be the
more memorable deals from Oracle. But its tiny purchase of Vir
tual Iron last year may better symbolize this strategy. A little more
than a month after the acquisition, the company sent a letter to
clients, advising them of its plans to suspend delivery of new orders.
Observers, such as CNets David Rosenberg, hypothesized that the
Virtual Iron deal makes clients think twice about opting for smaller
outfts.
Intels deal for McAfee seems to mimic Oracles approach to the
stability of bundled pricing.
Of course, consolidation in the name of pricing power usually
attracts attention from regulators. Te airline industry provides an
Outlook
M&A: A Pricing Panacea?
W
hen Onex Corp.s Seth Mersky delivered
the publicly held private equity frms sec-
ond-quarter results, he alluded to some
of the factors impacting the frms broader portfolio.
In particular, the downturn had led to productivity
declines and margin deterioration in the frms more
cyclical businesses. Te most difcult pill to swal-
low, he identifed, was pricing erosion, which was
being witnessed in the more competitive market-
places. Price erosion, unlike volume reductions, of-
fer no ofsetting beneft from cuts to working capital.
Moreover, as consumers well know, it can be hard to
reverse price declines even when prospects improve.
Dealmakers would probably point out that its one of
the reasons IBMs PC business became expendable.
M&A pros also know that the most obvious solution
to price erosion is to consolidate the market; its an
option, though, that is not without a lot of risk.
One pro, a managing director at an operations-fo-
cused PE frm, cites that M&A makes a ton of sense
for industry leaders fghting of competition from ri-
vals with overlapping product lines. On the fip side,
if the company is sub-scale, then M&A wont help
[improve pricing], the source says.
To be sure, price-driven M&A occurs all the time.
Its why antitrust authorities exist in the frst place.
But in todays market, where companies have cut
costs, rationalized work forces and reworked strate-
gies to ofset the troubled economy, consolidation can
be the fnal fx required to resume whatever growth
trajectory a company was on prior to the recession.
One example can be found in the market for out-
sourced radiology services. Nighthawk Radiology, in
its second-quarter earnings call, highlighted that year
over year, the company witnessed total price declines
in the low double digits. Tere was speculation in the
market that rival Virtual Radiologic was being par-
ticularly aggressive ahead of its going-private sale to
Providence Equity Partners, completed for $294 mil-
lion in July. In the last week of September, Nighthawk
was acquired by Virtual Radiologic.
Another player in the space, Alliance Healthcare
Services, is also looking to acquisitions to help miti-
gate pricing pressures. Wells Fargo analysts noted in
September that the company has several deals on the
two yard line. Te analysts added that the holdup
isnt due to valuations, but rather due diligence into
billing takes a signifcant amount of time.
Alliance has already acquired Radiology 24/7, and
additional oncology centers in Alaska and Arkansas.
As of its second-quarter conference call, it had be-
tween seven and 10 candidates with which it was in
active negotiations. Its worth noting too, that Oak-
tree Capital Management controls a roughly 45%
stake in the companys common stock, which could
make Alliance a target.
Consolidation, however, wont necessarily trans-
late into renewed pricing power unless actual barriers
to entry exist. Gerald Adolph, meanwhile, a senior
partner at management consulting frm Booz & Co.,
notes that M&A even in the name of pricing power
can itself lead to price erosion if acquirers arent
careful to gauge customer satisfaction both during the
deal and afterwards. Moreover, he cautions that the
announcement of a transaction makes a target out of
the companies involved, as rivals look to pick up mar-
ketshare amid the distraction.
George Geis, faculty director of the executive
mergers and acquisitions program at UCLAs Ander-
son School of Management, cites the M&A strat-
egy of Oracle as one of the more successful eforts
to preserve pricing power through acquisitions. But
the company isnt so much consolidating overlapping
services or products; its creating bundled packages
of software and database capabilities, creating a one-
stop-shop for companies to purchase enterprise hard-
ware and software.
Tere are some price protections involved in [the
Tamika Cody
ConsoIidation can mitigate pricing erosion, but it
doesn't aIways work and often introduces new risks
f the company
is sub-scale,
then M&A
won't help.

014_MAJNov10 2 10/8/2010 8:36:59 PM
M&A thesis], says Geis. Clearly what Oracle is trying to do is to
present companies with a bundle of services that locks them in.
Tis, Geis adds, gives Oracle the market strength to dictate the prices
charged for servicing the various hardware and software combina-
tions.
Acquisitions of Peoplesoft and Sun Microsystems may be the
more memorable deals from Oracle. But its tiny purchase of Vir-
tual Iron last year may better symbolize this strategy. A little more
than a month after the acquisition, the company sent a letter to
clients, advising them of its plans to suspend delivery of new orders.
Observers, such as CNets David Rosenberg, hypothesized that the
Virtual Iron deal makes clients think twice about opting for smaller
outfts.
Intels deal for McAfee seems to mimic Oracles approach to the
stability of bundled pricing.
Of course, consolidation in the name of pricing power usually
attracts attention from regulators. Te airline industry provides an
interesting case study.
Geis cites the deal between United Airlines and Continental,
which closed in the last week of September. Te $3.2 billion deal
should provide more control over route pricing, given the fact there
is an unlimited supply. Tat alone could provide some benefts,
although the two airlines will remain operationally separate for at
least a year until clearance comes from the FAA for a single operat-
ing certifcate. With FAA approval, further synergies will be derived
through the integration of planes, crews and maintenance.
While consolidation can mitigate pricing pressure, sometimes it
merely delays the inevitable as certain products become commod-
itized. Tat also speaks to why companies like Intel are looking to
M&A to broaden their product lines and fnd new areas of growth.
As the private equity source alluded, sub-scale companies can
do little to ofset pricing pressure through acquisitions.
In these cases, according to Geis, the answer might be to seek an
acquirer. At the very least it becomes someone elses problem.
M&A: A Pricing Panacea?
lion in July. In the last week of September, Nighthawk
Another player in the space, Alliance Healthcare
Services, is also looking to acquisitions to help miti-
gate pricing pressures. Wells Fargo analysts noted in
September that the company has several deals on the
two yard line. Te analysts added that the holdup
isnt due to valuations, but rather due diligence into
billing takes a signifcant amount of time.
Alliance has already acquired Radiology 24/7, and
additional oncology centers in Alaska and Arkansas.
As of its second-quarter conference call, it had be-
tween seven and 10 candidates with which it was in
active negotiations. Its worth noting too, that Oak-
tree Capital Management controls a roughly 45%
stake in the companys common stock, which could
Consolidation, however, wont necessarily trans-
late into renewed pricing power unless actual barriers
, meanwhile, a senior
Booz & Co.,
notes that M&A even in the name of pricing power
can itself lead to price erosion if acquirers arent
careful to gauge customer satisfaction both during the
deal and afterwards. Moreover, he cautions that the
announcement of a transaction makes a target out of
the companies involved, as rivals look to pick up mar-
, faculty director of the executive
mergers and acquisitions program at UCLAs Ander-
, cites the M&A strat-
egy of Oracle as one of the more successful eforts
to preserve pricing power through acquisitions. But
the company isnt so much consolidating overlapping
services or products; its creating bundled packages
of software and database capabilities, creating a one-
stop-shop for companies to purchase enterprise hard-
Tere are some price protections involved in [the
doesn't aIways work and often introduces new risks
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015_MAJNov10 3 10/12/2010 11:33:11 AM
LBO Watch
IPO BackIog Attracts Attention
T
he backlog of companies looking to go public
numbered more than 150 as of mid-Septem-
ber. Te size of the backlog refects both pro-
spective issuers need for liquidity and the difculty
companies are facing accessing public markets. As a
result, would-be IPOs are quickly turning into acqui-
sition targets.
In the frst week of October, Kelso & Co. fnalized
its deal to acquire restaurant chain Logans Roadhouse.
Logans, owned by PE shops Bruckmann Rosser Sher-
rill & Co. and Black Canyon Capital, had fled its S-1
two months prior to Kelsos announced acquisition,
valuing the company at $560 million. Ironically, the
selling sponsors had acquired Logans four years ear-
lier for $486 million after its former parent, CBRL
Group, had fled to spinout the company.
Other IPO candidates have followed a similar path.
Cognis had been lined up to go public, but opted for
a sale after BASF came through with an attractive of-
fer this summer, while chemical distribution business
Univar withdrew its registration statement fled with
the SEC and instead sold a 42.5% stake to private
equity frm Clayton Dubilier & Rice.
In times of economic dislocation, people will run
away from stocks, said Mat Wood, a partner at BDO
Seidman.
While its been months since the May fash crash,
the instability showcased in the 11 minutes of may-
hem underscores why some IPO candidates are only
too happy to eschew a public ofering when ofered
the option to sell.
Moreover, Wood hypothesizes that the presence of
private equity in the ownership groups makes some
IPO candidates more amenable to a sale.
An IPO isnt the favorite exit option for a private
equity frm... it doesnt provide immediate liquidity.
Evidence of this can be found in some of the pub-
lic companies that have also put themselves on the
block. Sales of publicly held DynCorp International,
Polymer Group and Burger King were all driven by
sponsor groups seeking a complete realization.
All things being equal, most sponsors would prob-
ably prefer to monetize their investments before the
years end, thanks to the threat of rising taxes and lin-
gering economic uncertainty.
To be sure, buyers are well aware of potential tar-
gets wallowing on the waitlist.
IPO documents give people access to informa-
tion about a private company they would otherwise
not have, said Tina Pappas, a managing director
with Morgan Joseph. We look at deals that have
been in registration for a good amount of time. Tey
present opportunities... they are not likely to go pub-
lic anytime soon.
Te IPO market is facing a sea change to its par-
ticipants as of late, as the market is increasingly over-
looking smaller, high growth candidates for the bigger
names that present more stable business prospects.
Its so much more difcult for a small-cap com-
pany to go public than a large-cap company, Pappas
said.
Still, the decision by Liberty Mutual to delay its
IPO in September, underscores that even the largest
candidates are having trouble gaining traction.
Ryerson Holding, the second largest metal distrib-
utor in North America, postponed its IPO shortly af-
ter the fash crash in May. Te company is owned by
Platinum Equity. Freeman Spoglis Smile Brands put
of its IPO around the same time. More recently, Linc
Logistics delayed its proposed ofering indefnitely.
Te inventory management company, which cited
market conditions, had planned to use the proceeds
to fund an unpaid dividend owed its former owner
since 2006.
Grant Tornton senior capital markets advi-
sor Edward Kim agrees with Pappas, citing that the
small-cap IPO market has been disproportionately
Jonathan Marino
Private equity funding makes candidates that much
more receptive to possibIe deaIs
An PO isn't
the favorite exit
option for a
private equity
frm.
BACKLOG continued on page 46

016_MAJNov10 4 10/8/2010 8:36:53 PM
LBO Watch
Other PeopIe's Equity
S
ponsors know they cant always time the market.
As outside factors drive liquidity events, many
are choosing to either take on co-investors who
can bring in fresh capital or maintain a signifcant
stake as a way to stay exposed to any future upside.
CVC Capital, in September, maintained a 42.5%
stake in Univar when it sold a matching position to
Clayton Dubilier & Rice. CVC had been looking to
foat the company on the public market, with the
proceeds going to pay down debt. CD&Rs purchase,
however, helps reach the same end and allowed CVC
to avoid tripping a change of control provision. Its ef-
fectively an equity cure with someone elses equity.
Other deals more closely resemble what occurs in
venture capital, where new money is introduced at
various stages of growth. New Mountains $115 mil-
lion investment in Stroz Friedberg, yielding a 50%
stake in the internet consulting and services frm,
followed a 2007, $30 million growth equity invest-
ment from Greenhill Capital Partners. While New
Mountains investment refects momentum, it didnt
necessarily present a realization for GCP.
John LeClaire, a partner at Goodwin Procter
who chairs the law frms private equity practice, says
he has been seeing these types of deals occur with
greater frequency over the past three years. Often-
times new investors are coming in at lower valuations
than the incumbent sponsors.
LeClaire identifes that growth equity investors are
taking on a more active role in these types of deals.
One distressed investor, speaking to Mergers & Ac-
quisitions, adds that they also view minority recaps as
a growing focus for their frm.
Carl Roston, co-head of M&A and private equity at
law frm Akerman Senterftt, cites these types of deals
represent a good compromise for sellers. Tey can recap-
italize the business, removing risk, distribute proceeds
to their investors, and still maintain a stake for a second
bite of the apple when either the market or the business
shows further improvement. Moreover, sponsors recog-
nize that their peers have to put money to work.
From the buyers perspective, there is an enor-
mous amount of dry powder, Roston adds, alluding
to the $485 billion overhang as of the end of the third
quarter, according to data provider PitchBook.
Meanwhile, buyers arent necessarily opposed to
the presence of incumbent stakeholders. Huntsman
Gay Capital Partners recently acquired a control stake
in business process outsourcing company iQor. Gug-
genheim Investment Management not only rolled
over its equity into the deal, but also signed on to
provide debt fnancing.
Gary Crittenden, a managing director at Hunts-
man Gay, tells Mergers & Acquisitions that Guggen-
heims willingness to stay on as an investor refected
their confdence in its future prospects. Teir famil-
iarity with the investment also helps, allowing for an
easier transition to new ownership.
If there are reservations about these deals for mid-
market investors, those generally reside in questions
about governance. Mid-market sponsors rarely pur-
sue club deals, and these investments have the added
complexity of introducing diverging valuations and
time horizons for the participating sponsors.
LeClaire, however, notes that these are topics that
are addressed well in advance of a deals close.
Tere is always a plan for what the liquidity will
be there are conversations about it and projections
made, he says. LeClaire adds that in the past, spon-
sors would even seek out an investor purely to validate
a valuation ahead an IPO.
As a failsafe, though, new money even if its a
minority stake typically comes with mechanisms
in place such as veto rights or put rights that can
either block a sale or force the issue if necessary.
But LeClaire cites that in most cases, the market
will be the determining factor. Te exit is going to be
Tamika Cody
PE rms are eschewing compIete exits, opting instead
to bring new investors in
There is
always a plan
for what the
liquidity will be.
NEW EQUITY continued on page 46

018_MAJNov10 5 10/8/2010 8:37:01 PM
LBO Watch
Infrastructure PIay Gains CIarity
I
n some circles, the infrastructure boom appeared
to be a dud. Investors rushed to the segment on
promises that it was more stable than other al-
ternative asset categories and would fll an unmet
demand potentially valued in the trillions of dollars.
It was only after money poured into the space that
investors started having questions. What are the exit
strategies? Where are the best opportunities within
infrastructure? Does a benchmark exist from which
to base performance? And the question that bares re-
peating: where, again, will the exits come from?
As sponsors fnally begin to notch realizations, the
infrastructure segment is gaining more clarity into the
type of assets sponsors will more frequently pursue in
the future -- refecting a shift from brownfeld plays,
such as toll-roads or parking facilities, to more tradi-
tional buyouts in companies that merely sell into or
service infrastructure needs.
Alinda Capital Partners, for instance, secured its
frst complete realization in September when it sold
Republic Intelligent Transportation Services to Sie-
mens Industry, Inc. Te sale of Republic ITS -- a ser-
vice provider handling trafc lights, call boxes, and
other highway related functions -- came three years
after the original investment. Black & Decker, mean-
while, launched an infrastructure platform with the
acquisition of Natural Gas Partners CRC-Evans, a
supplier of equipment and services to the oil and gas
pipelines market. And Honeywell International, this
summer, agreed to buy E-Mon LLC from Branford
Castle, a deal that will bolster its position in the smart
energy meter segment.
One factor that has never been in question in the
infrastructure space is the need for capital, which is
only becoming more pronounced as municipalities
struggle to maintain services amid funding shortfalls.
Te American Society for Civil Engineers estimated
last year that the US would require more than $2
trillion over the next fve years to fx the dilapidated
bridges, dams and rail systems. And local municipali-
ties facing defcits appear keen to ofoad functions
that could be better managed in private hands.
Austin Beutner, the Evercore Partners co-found-
er and former managing director who assumed the
helm of Los Angeles First Deputy Mayor post, spoke
about similar eforts at the recent ACG Los Angeles
Business Conference 2010. He said that LAs parking
business and other non-core municipal assets could
be leased out to third-party investors by the end of
the calendar year.
Other municipalities have also looked to the pri-
vate sector. New Jersey Department of Transporta-
tion (NJDOT) and the Pennsylvania Department
of Transportation (PennDOT) are proposing to do
a public-private partnership to revamp the Scudder
Falls Bridge. Private investors are also being sought
to help build a replacement for the Goethals Bridge
between New Jersey and New York, while ofcials
in Virginia were greeted with an unsolicited ofer to
takeover the operation of the Hampton Roads-Bridge
Tunnel.
To be sure, the money is still available to chip away
at these types of projects. Pensions & Investments re-
ported in the summer that infrastructure investment
managers had roughly $131.7 billion at their dispos-
al. What is uncertain, however, is whether these are
going to be the types of investments that are targeted
when investors become active again.
RBC Capital Markets John Hastings, a manag-
ing director and head of the frms US Infrastructure
team, cites that the downturn has kept most investors
on the sidelines in recent years. Te deal fow has not
kept up with the amount of money raised, he says.
Everyone was kind of paralyzed.
Anne Rabin, senior vice president of HOCHTI-
EFs PPP Solution, notes that while the stimulus bill
was initially expected to mute the impact of the credit
crisis, added government funding in infrastructure
Tamika Cody
It won't IikeIy be the toII roads or airports that drive
activity in the segment
The deal fow

has not kept
up with the
amount of
money raised.
has yet to translate into a wealth of opportunities. Much of the

stimulus went toward putting people in new jobs, which Rabin
cites, is obviously very important but still a short term view rather
than long term.
Amid the pause have come re-evaluations about whether the
opportunity set matches up with the mandates and structure of
private equity. PE funds, for instance, may increasingly fnd them
selves competing against pensions such as the Ontario Teachers
Pension Plan or CalPERS, which in June made its frst direct in
vestment in the segment, buying a nearly 13% stake in Londons
Gatwick Airport. In the frst week of October, the Canadian Pen
sion Plan Investment Board (CPPIB) bolstered its ownership in
Torontos ETR toll road, acquiring another 10% stake.
Te beneft the pensions have over private equity is that they
can be long-term holders of these assets -- that means theyre not
faced with the exit quandary that vexes investors operating through
a fund structure. Te Ontario Teachers Pension Plan, for instance,
keeps its infrastructure investments in a larger bucket that also
holds its timberland assets, underscoring the interminable nature
of both.
While the fundraising markets have sufered, sponsors target
ing infrastructure, in particular, have had a bumpy road in recent
years. Debut infrastructure funds from Macquarie and Goldman
Sachs hit $4 billion and more than $6.5 billion, respectively, ear
lier in the decade. Te follow-up eforts from both fund managers
wildly missed ambitious expectations, coming in billions under
stated targets. Macquarie raised just $1.5 billion and Goldman
pulled in $3.1 billion, well short of a $7.5 billion goal. Kohlberg
Kravis Roberts, meanwhile, reportedly had plans to raise as much
as $4 billion when it brought on George Bilicic to oversee invest
ments in the sector. Bilicics stay at the frm didnt last long, as he
returned to Lazard. KKR never even got the infrastructure fund
of the ground.
Still, a few notable deals have been cinched in recent years, pro
viding hope that the segment can still entice sponsors. Carlyles
joint venture in Project Service LLC, announced last December, is
one of the more interesting plays since the 2005 Chicago Skyway
deal put domestic infrastructure investments on the map. Carlyle,
alongside Subway Restaurants and other investors, entered into a
"Infrastructure investment
020_MAJNov10 6 10/8/2010 8:37:13 PM
Infrastructure PIay Gains CIarity
bridges, dams and rail systems. And local municipali-
ties facing defcits appear keen to ofoad functions
that could be better managed in private hands.
, the Evercore Partners co-found-
er and former managing director who assumed the
helm of Los Angeles First Deputy Mayor post, spoke
about similar eforts at the recent ACG Los Angeles
Business Conference 2010. He said that LAs parking
business and other non-core municipal assets could
be leased out to third-party investors by the end of
Other municipalities have also looked to the pri-
vate sector. New Jersey Department of Transporta-
tion (NJDOT) and the Pennsylvania Department
of Transportation (PennDOT) are proposing to do
a public-private partnership to revamp the Scudder
Falls Bridge. Private investors are also being sought
to help build a replacement for the Goethals Bridge
between New Jersey and New York, while ofcials
in Virginia were greeted with an unsolicited ofer to
takeover the operation of the Hampton Roads-Bridge
To be sure, the money is still available to chip away
at these types of projects. Pensions & Investments re-
ported in the summer that infrastructure investment
managers had roughly $131.7 billion at their dispos-
al. What is uncertain, however, is whether these are
going to be the types of investments that are targeted
, a manag-
ing director and head of the frms US Infrastructure
team, cites that the downturn has kept most investors
on the sidelines in recent years. Te deal fow has not
kept up with the amount of money raised, he says.
HOCHTI-
, notes that while the stimulus bill
was initially expected to mute the impact of the credit
crisis, added government funding in infrastructure
It won't IikeIy be the toII roads or airports that drive
has yet to translate into a wealth of opportunities.
Much of the stimulus went toward putting people
in new jobs, which Rabin cites, is obviously very
important but still a short term view rather than
long term.
Amid the pause have come re-evaluations about
whether the opportunity set matches up with the
mandates and structure of private equity. PE funds, for
instance, may increasingly fnd themselves competing
against pensions such as the Ontario Teachers Pension
Plan or CalPERS, which in June made its frst direct
investment in the segment, buying a nearly 13% stake
in Londons Gatwick Airport. In the frst week of Oc-
tober, the Canadian Pension Plan Investment Board
(CPPIB) bolstered its ownership in Torontos ETR toll
road, acquiring another 10% stake.
Te beneft the pensions have over private equity
is that they can be long-term holders of these as-
sets that means theyre not faced with the exit
quandary that vexes investors operating through a
fund structure. Te Ontario Teachers Pension Plan,
for instance, keeps its infrastructure investments in
a larger bucket that also holds its timberland assets,
underscoring the interminable nature of both.
While the fundraising markets have sufered,
sponsors targeting infrastructure, in particular, have
had a bumpy road in recent years. Debut infrastruc-
ture funds from Macquarie and Goldman Sachs hit
$4 billion and more than $6.5 billion, respectively,
earlier in the decade. Te follow-up eforts from
both fund managers wildly missed ambitious ex-
pectations, coming in billions under stated targets.
Macquarie raised just $1.5 billion and Goldman
pulled in $3.1 billion, well short of a $7.5 billion
goal. Kohlberg Kravis Roberts, meanwhile, report-
edly had plans to raise as much as $4 billion when
it brought on George Bilicic to oversee investments
in the sector. Bilicics stay at the frm didnt last long,
as he returned to Lazard. KKR never even got the
INFRASTRUCTURE continued on page 46
"Infrastructure invest-
ment managers have
roughIy $131.7 biIIion at
their disposaI."
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021_MAJNov10 7 10/12/2010 11:36:12 AM
Bottleneck
Bottleneck
Private
equity
frms race
to the
exits to
secure
realizations
before the
end of
the year
Danielle Fugazy
022_MAJNov10 1 10/8/2010 8:37:24 PM
A
Bottleneck
As of early October, Berkshire Partners had secured
six realizations so far this year. Te bookend deals for
the Boston frm were the sales of United BioSource,
which occurred less than a year after Berkshire in-
vested in the company, and the sale of its stake in
Advanced Drainage Systems (ADS), coming some 22
years after Berkshire frst backed the business. Sales
of American Tire Distributors, Electro-Motive Diesel
and publicly held Bare Escentuals, as well as second-
ary stock sales of Crown Castle International made
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023_MAJNov10 2 10/8/2010 8:37:32 PM
butions.
Fundraising is defnitely on peoples minds. Its
been a general theme all year, says Madison Capitals
Williams. We have been seeing exits and recaps; basi
cally any structure that will return money to the LPs
so the GPs will be in a better position.
Indeed, exits have taken on many forms. In some
cases, its about clearing out older properties, taking
whatever proft they can. Oak Hills sale of Duane
Reade for instance produced a small return for the
frm, but represented an unexpected victory for an
investment plagued by bad luck. Some frms have
even resorted to the piecemeal exit to clear out dead
wood. DLJ Merchant Banking, for instance, walked
away from its investment in DeCrane after 12 years
through separate sales of two divisions and a restruc
turing of its remaining assets.
Others, meanwhile, have used partial sales to
infuse portfolio companies with new equity, while
maintaining a stake for future upside. Guggenheim
Investment Management did this when it sold of
control in BPO provider iQor to Huntsman Gay
Capital Partners. Te return of the credit markets
has also allowed sponsors to revisit dividend recaps.
KPS Capital Partners has been among the more active
players in this segment, tallying at least fve recaps re
sulting in combined dividends nearing $500 million.
Te IPO market has probably been one of the few
disappointments for GPs, as many of the high pro
fle buyouts from the bubble, such as HCA, Toys R
Us, and Nielsen, have fled S-1s, but have been yet
to list shares. Te growing backlog which exceeds
150 companies hasnt dampened spirits, as PE-
backed names such as Restoration Hardware, GNC,
and Spirit Airlines all fled for IPOs in September and
October. Even special purpose acquisition companies
have re-appeared on the scene, providing perhaps an
other outlet, with Tom Hicks, LLM Partners and oth
ers fashioning new SPACs.
But for GPs, the best bets have been the straight
sales, whether its to strategic buyers or sales to their
peers. And considering both groups have sat on the
sidelines for the past two years, buyers often appear
as anxious as sellers. And for those with new funds on
the horizon, the timing couldnt be better.
Its a really good time to sell, Williams adds.
Many private equity frms are reaching their typical
hold period; some have even had to hold longer than
they wanted too. Tey now need to show returns to
Bottleneck
up the balance of Berkshires 2010 exit activity in the
frst 10 months of the year.
In the case of ADS, Berkshire managing director
Michael Ascione attests that the frm had never con-
sidered a sale of its holding until recently. It may not
seem like it to some, but the second half of 2010 is
indeed shaping up to be a once every quarter century
type of market.
To be sure, nobody will confuse 2010 with 2007
when it comes to total deal volume. But for the past
two years, sponsors have been in a state of suspended
animation, holding of on both new deal activity and
exits until clarity returned in terms of leverage and
business prospects. With the improvements in the
economy, portfolio company performance and the
credit markets, sponsors have viewed the second half
of the year the same way retailers view Black Friday.
And in terms of volume, some bankers have never
been busier.
Te salmon are running. You just have an enor-
mous amount of middle-market dealfow, says Justin
Abelow, a managing director with Houlihan Lokey
who has been in M&A for the past 20 years. You
have [the Bush era] tax cuts that may expire at the
end of the year, a pent up supply and uncertainty over
regulatory issues going forward. Its a confuence of
factors.
Te sunsetting break on capital gains taxes has
been a theme dealmakers have discussed for years. It
wasnt until this summer, however, that anyone ac-
tually showed any urgency. In one week in August,
M&A volume soared to $89.8 billion. Te third
quarter, meanwhile, saw global deal volume ring in
at $676.9 billion, representing the highest sum since
Lehman Brothers collapsed.
Private equity monetization activity has picked up
considerably, adds Moelis & Co. managing director
Roger Hoit. A stronger economy, robust fnancing
markets and the prospects of tax increases in 2011 has
driven deals forward at an accelerated pace. Almost
all the deals that were announced this past summer
originated in the beginning of the year. Te process
takes at least that long.
Hoit, for instance, spent more than a year advising
VMG Partners on its sale of Waggin Train to Nestle.
Te deal was announced in September.
Assuming there is no extension of the capital gains
tax cuts, deals completed after Dec. 31, 2010, will see
increase of 500 basis points in tax rates.
Its real cash that makes a diference to the seller,
but absolutely no diference to the buyer. Its true arbi-
trage, says Stewart Kohl, co-CEO of Te Riverside
Company, which had exited six companies as of the
frst of October. Its most recent realization was the
sale of Stofel Seals, which generated a healthy 2.7x re-
turn on investment and respectable 18% gross IRR.
If you owned something when the world was go-
ing nuts and it was worth $100 and then the world
crashed and it was suddenly worth $70, than you
might become a seller when that asset is now worth
$85, Kohl says, describing the mindset of sellers. Its
not as good as it was, but its still pretty darn good.
Among Riversides better exits was its disposition
of Commonwealth Laminating & Coating, which
generated a 10x cash-on-cash return.
We have done our job with these companies.
We have doubled and sometimes tripled the Ebitda
through organic growth and add-on acquisitions.
Tese companies have more upside, but now was the
right time to sell, Kohl notes, alluding to the fact that
limited partners are hungry for distributions.
While a number of factors have colluded to spur
exits, the improved fnancing market deserves the
credit for bridging buyer and seller expectations.
Quality middle market companies can expect to get
2.5x to 3.25x of senior debt and another turn to turn
and half of mezzanine debt.
We have seen robust activity for 2010. Were
not at the 2006, 2007 levels, but its certainly been
as good as any point over the last 24 months, attests
Christopher Williams, a senior managing director
with Madison Capital Funding. Te commercial
banks and specialty fnance companies have been ac-
tive and I dont foresee that stopping unless theres a
total meltdown. BDCs are more active again as well.
Te only thing we are not seeing is the second lien
players returning to the market.
Kohl alluded to it, but in the back of every GPs
mind these days are their limited partners. During
sponsors two years in hibernation, the clock ticking
on their funds investment period didnt stop. Tat
means GPs are facing a tightening window within
which to put their remaining capital to work. It also
means they have to start thinking about their next
funds, especially as the time it takes to raise a new ve-
hicle today has stretched out to more than 19 months
on average. While there are a host things LPs say they
want, the only thing that really matters are the distri-
The salmon
are running.

024_MAJNov10 3 10/8/2010 8:37:39 PM
Many private
equity frms are
reaching their
typical hold
period.
butions.
Fundraising is defnitely on peoples minds. Its
been a general theme all year, says Madison Capitals
Williams. We have been seeing exits and recaps; basi-
cally any structure that will return money to the LPs
so the GPs will be in a better position.
Indeed, exits have taken on many forms. In some
cases, its about clearing out older properties, taking
whatever proft they can. Oak Hills sale of Duane
Reade for instance produced a small return for the
frm, but represented an unexpected victory for an
investment plagued by bad luck. Some frms have
even resorted to the piecemeal exit to clear out dead
wood. DLJ Merchant Banking, for instance, walked
away from its investment in DeCrane after 12 years
through separate sales of two divisions and a restruc-
turing of its remaining assets.
Others, meanwhile, have used partial sales to
infuse portfolio companies with new equity, while
maintaining a stake for future upside. Guggenheim
Investment Management did this when it sold of
control in BPO provider iQor to Huntsman Gay
Capital Partners. Te return of the credit markets
has also allowed sponsors to revisit dividend recaps.
KPS Capital Partners has been among the more active
players in this segment, tallying at least fve recaps re-
sulting in combined dividends nearing $500 million.
Te IPO market has probably been one of the few
disappointments for GPs, as many of the high pro-
fle buyouts from the bubble, such as HCA, Toys R
Us, and Nielsen, have fled S-1s, but have been yet
to list shares. Te growing backlog which exceeds
150 companies hasnt dampened spirits, as PE-
backed names such as Restoration Hardware, GNC,
and Spirit Airlines all fled for IPOs in September and
October. Even special purpose acquisition companies
have re-appeared on the scene, providing perhaps an-
other outlet, with Tom Hicks, LLM Partners and oth-
ers fashioning new SPACs.
But for GPs, the best bets have been the straight
sales, whether its to strategic buyers or sales to their
peers. And considering both groups have sat on the
sidelines for the past two years, buyers often appear
as anxious as sellers. And for those with new funds on
the horizon, the timing couldnt be better.
Its a really good time to sell, Williams adds.
Many private equity frms are reaching their typical
hold period; some have even had to hold longer than
they wanted too. Tey now need to show returns to
their LPs.
And many have; some in a huge way. Huron Capi-
tal secured a venture-like 18.7x return on its original
investment in post-secondary education provider Ross
Education. Te sale came after a fve year holding pe-
riod and cemented a 76% IRR for the frm. Other
notable exits include Arsenal Capitals sale of IDQ to
Castle Harlan, which resulted in an 8x return on eq-
uity after an eight-year stay in the frms portfolio.
Overall now is a good time to sell. I wouldnt
call today robust, but things are stable, says Harvest
Partners senior managing director Ira Kleinman.
In general private equity portfolios are getting a little
long in the tooth and its time to move. As business
continues to improve you will see a lot more compa-
nies come up for sale.
Harvest Partners, alongside co-investor Investcorp,
recently agreed to exit Associated Materials through a
secondary sale to Hellman & Friedman for $1.3 bil-
lion. Harvest had originally invested in the vinyl win-
dow and siding maker in 2002.
According to participants in the market, both stra-
tegic buyers and sponsors are proving themselves to
be aggressive in the market.
Te cost of capital for sponsors is very low and
it allows them to be competitive, says Moelis Hoit.
However, the strategics are still in the mix, which
shows that they are comfortable with their businesses
and moving forward with growth initiatives.
To be sure, the experience of some in the market
may be wildly diferent from others. Te properties
that are generating buy-side interest are assets that are
battle-tested. Berkshires Ascione qualifes that its a
good exit environment if your companies are per-
forming well.
For those that arent, Hoit says, those processes
arent as well attended.
Dealmakers arent quite sure what to expect when
the clock strikes midnight on December 31. Uncer-
tainty remains in the form economic questions, po-
tential legislation and the sustainability of the credit
markets. Assuming the status quo, however, observers
anticipate sponsors will continue to demonstrate ur-
gency in their eforts to fnd the door.
Some deals just couldnt get done before the end
of the year because they werent the highest quality
and frms were focusing on their best assets, says one
banker. Tese companies will still be in the market
and they will fnd homes.
Its real cash that makes a diference to the seller,
but absolutely no diference to the buyer. Its true arbi-
Te Riverside
, which had exited six companies as of the
frst of October. Its most recent realization was the
sale of Stofel Seals, which generated a healthy 2.7x re-
turn on investment and respectable 18% gross IRR.
If you owned something when the world was go-
ing nuts and it was worth $100 and then the world
crashed and it was suddenly worth $70, than you
might become a seller when that asset is now worth
$85, Kohl says, describing the mindset of sellers. Its
not as good as it was, but its still pretty darn good.
Among Riversides better exits was its disposition
of Commonwealth Laminating & Coating, which
We have done our job with these companies.
We have doubled and sometimes tripled the Ebitda
through organic growth and add-on acquisitions.
Tese companies have more upside, but now was the
right time to sell, Kohl notes, alluding to the fact that
limited partners are hungry for distributions.
While a number of factors have colluded to spur
exits, the improved fnancing market deserves the
credit for bridging buyer and seller expectations.
Quality middle market companies can expect to get
2.5x to 3.25x of senior debt and another turn to turn
We have seen robust activity for 2010. Were
not at the 2006, 2007 levels, but its certainly been
as good as any point over the last 24 months, attests
, a senior managing director
. Te commercial
banks and specialty fnance companies have been ac-
tive and I dont foresee that stopping unless theres a
total meltdown. BDCs are more active again as well.
Te only thing we are not seeing is the second lien
Kohl alluded to it, but in the back of every GPs
mind these days are their limited partners. During
sponsors two years in hibernation, the clock ticking
on their funds investment period didnt stop. Tat
means GPs are facing a tightening window within
which to put their remaining capital to work. It also
means they have to start thinking about their next
funds, especially as the time it takes to raise a new ve-
hicle today has stretched out to more than 19 months
on average. While there are a host things LPs say they
want, the only thing that really matters are the distri-
025_MAJNov10 4 10/8/2010 8:37:52 PM
et cetera. Tere is more pregame dialogue than there used to be be
cause most managers are still uneasy about the market. Also, the last
time around LPs were pushed around a bit, with GPs raising capital
when they didnt even need the money, so youd see situations in
which the funds would just sit on the shelf.
Mergers & Acquisitions:
investor interest?
McAndrews:
saying they want smaller fund sizes for the sake of smaller funds, but
we want to be taken seriously when we say that the fund size should
make sense for the strategy, the team thats in place and the current
deal environment.
Te big hot button right now is an alignment of interest. Teres
more focus on fees; not just lower fees, but an economic relationship
Q&A
LPs are much

more sensitive
to fund size.
Q&A: AIign in the Sand

S
usan Long McAndrews has been an in-
vestor in private equity for over 15 years.
A partner at Pantheon, who sits on the
frms executive committee, McAndrews
is still bullish about the asset class. She
cites that with the renewal of activity in the deal mar-
ket, GPs are also starting to see a thawing in the fund-
raising market. Tats not to say that recent changes
to areas such as fund sizes, terms and overall expecta-
tions arent going to stick.
McAndrews is not a believer in gimmicks, whether
its an opt out clause, as some GPs have introduced, or
a shop early discount to incentivize LPs. She notes
that transparency and alignment
of interests can go a long way,
and adds that limiteds were tak-
ing notes during the bubble. Tat
means that while some GPs have
built up moral credits, others
may face blowback for their ac-
tions in 2006 and 2007.
Te following is an edited ver-
sion of a conversation with McAn-
drews from September.
Mergers & Acquisitions: Te deal
market is starting to perk up. Are
you getting a sense that the fund-
raising market is improving too?
McAndrews: Te fundraising
market has defnitely been open-
ing up over the last nine months.
Tere were some groups in the market during a really
tough environment, who had launched new funds
in late 2008. In some cases, a few have been able to
gather some real momentum and are approaching f-
nal closings.
Its still going to be feast or famine, though. Inves-
tors have been paring down the number of relation-
ships they have so you have some groups out there
hitting their hard caps and others that just cant gain
any traction.
Mergers & Acquisitions: Where are GP expectations?
It seems like were seeing a lot of groups come in under
previous fund sizes?
McAndrews: Were fnding that targets are generally
fat or even slightly down. Its a pretty tall order right
now for a GP to come out in this
market and expect that theyll be
able to a close on a meaningful
increase in fund size. Beyond the
market conditions, its just hard to
justify in terms of the underlying
deal fow. Its been pretty lumpy
lately.
Limited partners are also much
more sensitive to fund size. Tere
were such aggressive increases in
fund sizes during the bubble and
it didnt serve limited partners
very well. Smart GPs are attuned
to that.
Mergers & Acquisitions: Is there
a more robust pre-marketing efort
on the part of GPs?
McAndrews: I wouldnt say its pre-marketing per se,
but there has been a lot more dialogue between GPs
and existing investors about when should they come
back; under which conditions LPs will be supportive,
Ken MacFadyen
Pantheon Ventures' Susan Long McAndrews says LPs
are insisting on transparency and aIignment if they're
going to back new funds
Susan Long McAndrews
026_MAJNov10 1 10/8/2010 8:38:21 PM
et cetera. Tere is more pregame dialogue than there used to be be-
cause most managers are still uneasy about the market. Also, the last
time around LPs were pushed around a bit, with GPs raising capital
when they didnt even need the money, so youd see situations in
which the funds would just sit on the shelf.
Mergers & Acquisitions: What needs to be in place today to draw
investor interest?
McAndrews: Te fund size has to make sense. Its not that LPs are
saying they want smaller fund sizes for the sake of smaller funds, but
we want to be taken seriously when we say that the fund size should
make sense for the strategy, the team thats in place and the current
deal environment.
Te big hot button right now is an alignment of interest. Teres
more focus on fees; not just lower fees, but an economic relationship
in which the fee income refects the alignment. LPs better under-
stand how fees are being used and how it afects decisionmaking.
Mergers & Acquisitions: Does the ILPA get the credit for these discus-
sions?
McAndrews: Te Private Equity Principles certainly help. It gets
more people saying the same thing to GPs, but I really think these
discussions are the result of the fnancial crisis. All of a sudden, there
is a dearth of capital.
And LPs were faced with poor returns. Te frustration just reached a
point that a consensus formed around the idea that things are going
to have to work diferently going forward.
Mergers & Acquisitions: What are some of the specifc characteristics
that youll look for to ensure interests are aligned?
Q&A: AIign in the Sand
Its still going to be feast or famine, though. Inves-
tors have been paring down the number of relation-
ships they have so you have some groups out there
hitting their hard caps and others that just cant gain
Where are GP expectations?
It seems like were seeing a lot of groups come in under
Were fnding that targets are generally
fat or even slightly down. Its a pretty tall order right
now for a GP to come out in this
market and expect that theyll be
able to a close on a meaningful
increase in fund size. Beyond the
market conditions, its just hard to
justify in terms of the underlying
deal fow. Its been pretty lumpy
Limited partners are also much
more sensitive to fund size. Tere
were such aggressive increases in
fund sizes during the bubble and
it didnt serve limited partners
very well. Smart GPs are attuned
Mergers & Acquisitions: Is there
a more robust pre-marketing efort
I wouldnt say its pre-marketing per se,
but there has been a lot more dialogue between GPs
and existing investors about when should they come
back; under which conditions LPs will be supportive,
Pantheon Ventures' Susan Long McAndrews says LPs
are insisting on transparency and aIignment if they're
027_MAJNov10 2 10/12/2010 11:30:02 AM
Q&A
McAndrews: We like to see larger GP commitments that take the
form of cash as opposed to the fee-waiver. And more clarity around
the transaction fees and monitoring fees is important. Preferably
those fees will just go away, but if not, wed like to see 100% ofset
against management fees. I think there is also a desire to move away
from a fee on committed capital.
Mergers & Acquisitions: Is 2% still the standard in terms of man-
agement fee? And is part of the concern on the part of LPs that private
equity has turned into a fee-income type of business as opposed to an
investment business especially as larger funds have made the jump to
the public markets?
McAndrews: Te management fee has moved lower as groups have
raised larger funds, but it hasnt gone down in proportion to the
amount of capital theyve raised. Some predictability over the rev-
enue stream is a good thing for limited partners. Youre basically say-
ing: Here are the resources; hire your team and do what you have
to do to invest the money. Te business is not about how quickly
you can put out capital, or how quickly the fees stack up as you raise
successor vehicles. Two percent makes sense when GPs are managing
one or maybe two funds. But wed like to see stepdowns in fees when
groups form new funds or once the investment period ends. It goes
back to creating more alignment.
As far as the public PE frms, one of the complaints youll hear
voiced pretty regularly is that all of a sudden this new constituency
[public shareholders] has a very keen interest in recurring revenues,
new products and fee streams, and all of that is not necessarily in the
best interest of the limited partners.
Mergers & Acquisitions: So many funds claim to be top quartile,
except perhaps for those that claim to be top decile. How do you view
return data in terms of benchmarking performance?
McAndrews: We look at both IRR and multiples of capital. Were
sensitive to and able to make our own conclusions about a fund with
one-of, high IRRs. Te key is whether a return is replicable or not.
Te gross-to-net spread of the fund is important too. Tis comes
into play when managers dont correctly utilize all of the capital were
committing to them. If GPs leaves 15% to 20% of the capital for
reserves and it doesnt end up getting used, it creates a larger spread.
Wed like to see that capital getting used, especially if theyre charging
2% on it for much of the life of the fund.
Reserves have always been a difcult thing. You want GPs to be
conservative, but you would like to see a mechanism in place that
either allows GPs to recycle capital within the older fund, so you
have better fund utilization, or use the capital alongside the successor
fund in new deals for a period fo time.
Mergers & Acquisitions: Outside of performance, did the credit crisis
expose anything that you otherwise wouldnt have known about GPs?
McAndrews: I cant think of a lot of examples of bad behavior either
during or after the crisis. We found that some GPs were more adept
at pulling the trigger on opportunities. Most of our GPs tend to be
pretty savvy about not making the good capital after bad invest-
ments.
We will look pretty rigorously at behavior during the bubble.
Terell be a lot of scrutiny into investment decisions. You have the
classic examples of folks who just piled on way too much leverage.
Well also look at how groups behaved during their 2007 fundraise.
If GPs didnt take advantage of how far the pendulum had swung in
their favor, then theyve built up some goodwill, for sure, and thats
important today.
Mergers & Acquisitions: Whats the market like for emerging managers?
McAndrews: Tere is always a desire and need for new blood in
the fund manager pool. Typically, we like to see situations involving
groups spinning out of another organization or a story in which the
manager has a track record working together as a team. Te groups
that have that can tell a much more compelling story in terms of
strategy.
Mergers & Acquisitions: How has the LP universe changed? Has
there been a shift in the balance of power?
McAndrews: GPs are always going to try to do as well as they can
with their existing investor base. Te check writing ability may be
diferent now. Tere has certainly been some consolidation going on
in the fund of funds business. I dont think its any secret that the
sovereign wealth funds out of Asia and elsewhere have been quite ac-
tive. I think the endowments probably made it through better than
anyone would have thought a year ago.
Mergers & Acquisitions: What do you make of the debate going on in
South Carolina, and whether or not the pension there should take on a
direct model, similar to what you might see in Canada?
McAndrews: Teres certainly a desire by institutions to manage fees
and get closer to the assets. Were seeing it with pensionsthat would
like to work with us through our co-investment program. Its hard
to do successfully, though.
Pensions would have to hire staf internally to manage the assets
and retain them over a long period of time. Tats hard to do. I can
see why there is interest in something like that, but to do it consis-
tently, over a ten-year period is a challenge.
general partners. Tey appreciate having the extra capital at their dis
posal, but co-investments can really slow down the deal process if limiteds
arent experienced with them. What is the feedback you hear from GPs?
McAndrews:
gram. We fnd that GPs like working with groups that have a dedi
cated program and a co-investment team, who can respond quickly.
Co-investments are a reality of the market. Every GP is going to
come across a deal that is too large for their fund. Tey come back
to the same LPs when they have a good experience with them. Even
when our answer is no, we respond quickly. If the GPs experience
is that LPs dont react quickly enough or have processes that are too
long or too cumbersome, then they wont get the next call.
028_MAJNov10 3 10/8/2010 8:38:10 PM
Outside of performance, did the credit crisis
expose anything that you otherwise wouldnt have known about GPs?
I cant think of a lot of examples of bad behavior either
during or after the crisis. We found that some GPs were more adept
at pulling the trigger on opportunities. Most of our GPs tend to be
pretty savvy about not making the good capital after bad invest-
We will look pretty rigorously at behavior during the bubble.
Terell be a lot of scrutiny into investment decisions. You have the
classic examples of folks who just piled on way too much leverage.
Well also look at how groups behaved during their 2007 fundraise.
If GPs didnt take advantage of how far the pendulum had swung in
their favor, then theyve built up some goodwill, for sure, and thats
Whats the market like for emerging managers?
Tere is always a desire and need for new blood in
the fund manager pool. Typically, we like to see situations involving
groups spinning out of another organization or a story in which the
manager has a track record working together as a team. Te groups
that have that can tell a much more compelling story in terms of
How has the LP universe changed? Has
GPs are always going to try to do as well as they can
with their existing investor base. Te check writing ability may be
diferent now. Tere has certainly been some consolidation going on
in the fund of funds business. I dont think its any secret that the
sovereign wealth funds out of Asia and elsewhere have been quite ac-
tive. I think the endowments probably made it through better than
What do you make of the debate going on in
South Carolina, and whether or not the pension there should take on a
Teres certainly a desire by institutions to manage fees
and get closer to the assets. Were seeing it with pensionsthat would
like to work with us through our co-investment program. Its hard
Pensions would have to hire staf internally to manage the assets
and retain them over a long period of time. Tats hard to do. I can
see why there is interest in something like that, but to do it consis-
Mergers & Acquisitions: I hear mixed views on co-investments from
general partners. Tey appreciate having the extra capital at their dis-
posal, but co-investments can really slow down the deal process if limiteds
arent experienced with them. What is the feedback you hear from GPs?
McAndrews: We play a very active role with our co-investment pro-
gram. We fnd that GPs like working with groups that have a dedi-
cated program and a co-investment team, who can respond quickly.
Co-investments are a reality of the market. Every GP is going to
come across a deal that is too large for their fund. Tey come back
to the same LPs when they have a good experience with them. Even
when our answer is no, we respond quickly. If the GPs experience
is that LPs dont react quickly enough or have processes that are too
long or too cumbersome, then they wont get the next call.
Mergers & Acquisitions: Amid the difcult fundraising market, weve
seen some innovation in terms of fund structures. One group is doing
away with management fees in exchange for 100% of the deal feels;
another is ofering a shop early discount for LPs who commit in the
frst round; and others have structured their funds to allow LPs to opt
out of specifc investments. Do these types of structures appeal at all to
LPs?
McAndrews: Te short answer is, no. Te opt-out mechanism can
be difcult to manage. What do you do if two thirds of your investor
base wants to opt out? If Im an LP in that fund, I wouldnt like the
prospect of suddenly being forced to take on a larger stake because
other LPs opted out.
I dont think the early bird discounting is something that well see
a lot of either. If youre an existing investor and for some reason youre
not able to make a decision on the frst close, youre not going to enjoy
being penalized for something that is beyond your control.
A Proactive Buyers Solution
for Quickly Finding Targeted Acquisitions
David E. Schenkel
VP, Business Development
davids@
www.valufindergroup.com
valufindergroup.com
212-243-1133
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Deal Flow
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029_MAJNov10 4 10/12/2010 11:35:01 AM
Tat is having an impact on deal volume, said
aging director with
transactions with a minimum of $25 million in Ebitda. Its hard to
fnd sizable opportunities and an adequate array in Canada.
Te Ontario Teachers Pension Plan, which has had a direct in
vestment program since it started investing in private equity in 1991,
completed six deals in the frst half, including three in the US -- Sim
mons Bedding Co, infant products maker Munchkin, and Exal, the
worlds largest specialty maker of aluminum containers.
Teachers could also be credited with helping goose the domestic
market, as it made a $150 million commitment in September to
provide growth funding for NXT Capital, a middle-market com
mercial fnance company based in Chicago. Teachers also regularly
pairs of with US investors, as demonstrated by its recent acquisi
tions of INC Research, in August, alongside Avista Capital Partners,
and its July acquisition of SonicWall, backing Toma Bravo.
In many cases the strength of the Canadian dollar is playing a
t's not that

Canadians
want to be
in the United
States. t's that
they want to
buy the best
companies.
Tracking the EagIe

T
he Hickey family, which has owned the
label equipment maker Smyth Cos. for
more than a century, saw an opportunity
to expand the St. Paul company. Te fam-
ily hired Harris Williams & Co. to help
it fnd a partner. After considering their options, the
Hickeys sold a majority stake in Smyth in January to
NovaCap, a Canadian middle-market private equity
frm. Tere were plenty of competing bids from US
frms, but the family decided that NovaCap was the
right ft. Tey chose to overlook the complexities that
come with a cross-border deal.
Increasingly, deals like the sale of Smyth are be-
coming more common. In the frst half of 2010, 78%
of companies bought by Canadian frms were locat-
ed in the United States, according to data provider
Mergermarket. While deal volume
has increased, Canadian frms are not
newcomers to the US M&A market.
Given the proximity and the fact that
Canada has roughly one-tenth the
population of the United States, Ca-
nadian acquirers have long consid-
ered the US a great hunting ground.
Its not that Canadians want to
be in the United States. Its that they
want to buy the best companies, said
Domenic Mancini, a general partner
with NovaCap and the lead investor
on the Smyth deal.
A strong Canadian banking sys-
tem, a strong Canadian dollar and a
quest for larger deals are making the
United States even more attractive for potential deal-
makers.
No matter where the deal is located, theres a host
of diferent factors we need to look at to make sure a
deal is a good one, but the US is an attractive place to
fnd deals, said Deborah Allan, director of commu-
nications for the Ontario Teachers Pension Plan.
Glenn Gurtchef, a managing director at Har-
ris Williams who advised on the Smyth deal, notes
that much of the activity has been opportunistic, as
Canadian acquirers, emboldened by a healthier bank-
ing system, were able to step up to the plate in recent
years while domestic buyers showed caution.
To be sure, not a single Canadian bank failed when
the credit crisis hit in 2008. And Canada is the only
G-7 country that did not have to put money into the
fnancial sector, according to David Drinkwater,
chairman of Rothschild Canada.
Five years ago, no Canadian bank made the list of
top 10 North American banks by assets. Today, four
of the top 10 are Canadian Royal Bank of Canada,
Toronto-Dominion Bank, Scotia-
bank and Bank of Montreal.
Canada doesnt have the legacy
of the credit crisis that the US and
Europe have to deal with, said Zach
Pandl, a US economist at Nomura.
From a macro standpoint, Canada
is in pretty good shape relative to
their global peers.
Another trend fueling Canadian
dealmaking: Many of the countrys
pension plans (including Alberta
Investment Management Corp., the
Public Sector Pension Investment
Board and the Ontario Munici-
pal Employees Retirement System)
have launched or expanded direct
investment programs. To put money to work, these
programs must look beyond Canadian borders, and
North American borders, for that matter.
Tere are fewer opportunities in Canada, and a
number of the large pension funds are going direct.
DanieIIe Fugazy
A heaIthy banking system, a stabIe doIIar, and gIobaI
ambitions are driving Canadian buyers to cross the border
Canada Report
GIenn Gurtcheff
030_MAJNov10 1 10/8/2010 8:38:23 PM
Tat is having an impact on deal volume, said Bill Roman, a man-
aging director with Harris Williams. Tese funds are looking for
transactions with a minimum of $25 million in Ebitda. Its hard to
fnd sizable opportunities and an adequate array in Canada.
Te Ontario Teachers Pension Plan, which has had a direct in-
vestment program since it started investing in private equity in 1991,
completed six deals in the frst half, including three in the US -- Sim-
mons Bedding Co, infant products maker Munchkin, and Exal, the
worlds largest specialty maker of aluminum containers.
Teachers could also be credited with helping goose the domestic
market, as it made a $150 million commitment in September to
provide growth funding for NXT Capital, a middle-market com-
mercial fnance company based in Chicago. Teachers also regularly
pairs of with US investors, as demonstrated by its recent acquisi-
tions of INC Research, in August, alongside Avista Capital Partners,
and its July acquisition of SonicWall, backing Toma Bravo.
In many cases the strength of the Canadian dollar is playing a
small role in deals. After going on a roller-coaster ride since 2004,
the Canadian dollar has stabilized over the last year and the Bank of
Canada was the frst G-7 central bank to raise interest rates since the
start of the global recession. Patricia Croft, the former chief econo-
mist for RBC Global Asset Management, even predicted for CTV.ca
in October that the Loonie could soar to as high $1.15 against the
greenback over the next 12 months.
Tough most industry experts agree that currency does not and
will not drive the market, the Loonies strength can give Canadian
frms an advantage when doing deals in the US.
It can be a positive factor, but the Canadian dollar has been
volatile, and frms have to live with it both ways, Drinkwater said.
Any company buying in a diferent market has to deal with the
fuctuation in foreign exchange and make adjustments. Its just part
of the package.
In the meantime, the Loonie symbolizes why Canadian buyers
are fying South in the name of dealfow.
, director of commu-
Ontario Teachers Pension Plan.
, a managing director at Har-
who advised on the Smyth deal, notes
that much of the activity has been opportunistic, as
Canadian acquirers, emboldened by a healthier bank-
ing system, were able to step up to the plate in recent
years while domestic buyers showed caution.
To be sure, not a single Canadian bank failed when
the credit crisis hit in 2008. And Canada is the only
G-7 country that did not have to put money into the
David Drinkwater,
Five years ago, no Canadian bank made the list of
top 10 North American banks by assets. Today, four
of the top 10 are Canadian Royal Bank of Canada,
Toronto-Dominion Bank, Scotia-
bank and Bank of Montreal.
Canada doesnt have the legacy
of the credit crisis that the US and
Europe have to deal with, said Zach
, a US economist at Nomura.
From a macro standpoint, Canada
is in pretty good shape relative to
Another trend fueling Canadian
dealmaking: Many of the countrys
pension plans (including Alberta
Investment Management Corp., the
Public Sector Pension Investment
Board and the Ontario Munici-
pal Employees Retirement System)
have launched or expanded direct
investment programs. To put money to work, these
programs must look beyond Canadian borders, and
Tere are fewer opportunities in Canada, and a
number of the large pension funds are going direct.
A heaIthy banking system, a stabIe doIIar, and gIobaI
ambitions are driving Canadian buyers to cross the border
E
M&A news and insight Ior the middle market
Log on to TheMidd|eMurket.com/register to slgn up for M&A hot toplcs, whlte popers, guest ortlcles ond much more.
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031_MAJNov10 2 10/12/2010 11:42:13 AM
A lot of larger
companies are
acquiring these
tuck-in deals
as a purchased
R&D strategy.
Research in Motion:
Turning M&A into R&D
A
s Apple continually drives technol-
ogy change, Research in Motion has
been forced into playing catch-up. Te
company, however, has thus far proven
successful at using M&A to get up to
speed.
Research in Motions last two years of deal his-
tory suggests coming quarters will see a proliferation
of its products and an expansion of its footprint af-
ter spending years watching its prime competitors
outperform. Te company recently announced the
launch of its Playbook, a tablet that will compete
with Apples iPad. Te deal that made the Playbook
possible was the companys acquisition of QNX Soft-
ware Systems from Harman
International. Meanwhile,
Research in Motions recently-
launched BlackBerry Torch
phone is a product of the
companys 2009 acquisition
of Torch Mobile. Te Torch
is an answer to critics com-
plaints that Research in Mo-
tions smartphones left some-
thing to be desired in terms of
users browser and document viewing needs.
Te company didnt stop there. It also bought
DataViz in September, in a deal rumored to cost
the company about $50 million that also enhanced
its document viewers on its smartphones. Other up-
grades came from the companys early 2010 deal to
buy Viigo, a BlackBerry app maker, and Dash Navi-
gation, in 2009, which improved RIM devices map-
ping and navigation function for around $8 million.
A lot of larger companies are acquiring these tuck-
in deals as a purchased R&D strategy, said Tony Al-
fonso, president of BDO Valuation Advisors.
A source familiar with the companys strategy pre-
dicts that as Research in Motion continues to fght
of lesser competitors with its buy-and-develop R&D
strategy, more deals lie ahead.
In March 2009, Research in Motion acquired Cer-
ticom Corp. in an efort to improve its devices se-
curity, spending $106 million. Tis August, Research
in Motion also bought CellMania, a retail storefront
operator, which expanded its footprint overnight and
provided a shot in the arm to its BlackBerry App
World platform, increasing its product visibility.
Te target, of course, is Apple, which is making
headway in Blackberrys core
business market.
Te reason iPhone is so
popular is because of the ap-
plication library, Alfonso
said. All these devices are fo-
cused on applications.
Even with Research in Mo-
tion again playing catch-up to
launch a tablet that will com-
pete with Apples iPad in the
next few months, analysts expect Steve Jobs newest
must-have gadget will still command the majority
of market share. A Hapaolim Securities note posted
at Tomson One Analytics in September called Re-
search in Motions Torch device, its latest product
for smartphone consumers, clearly not in the same
league as the iPhone4.
It wouldnt be a surprise if Research in Motion
turned to another tuck-in, or perhaps even something
more signifcant to close the gap.
Jonathan Marino
As the Canadian tech giant competes with AppIe, it has
successfuIIy used acquisitions to augment its new products
Canada Report
032_MAJNov10 3 10/8/2010 8:38:42 PM
Guest Article
The unique
nature of busi-
ness unit dis-
positions will
often heighten
the importance
of post-closing
obligations.
Guideposts for a Carveout

A
recurring, yet nonetheless always chal-
lenging M&A scenario involves the sit-
uation where a buyer seeks to acquire a
business unit that is being sold of by a
large company.
Te reasons for the sale can be varied. Te busi-
ness unit may no longer be a good ft with the larger
enterprises overall business strategy. Te business unit
may require a signifcant infusion of cash or other re-
sources that the parent is not prepared or equipped to
contribute. Or the larger enterprise may be struggling
and eager to raise cash for its core business.
Whatever the reasons (and it is advisable for a
buyer to ferret out what are the true reasons), such
transactions present unique op-
portunities as well as challenges.
Unless attuned to the distinctive
aspects of such corporate dispo-
sitions, a prospective buyer can
easily be tripwired by unwelcome
surprises.
For would-be buyers exploring
such a transaction, its important
to consider certain key guideposts.
Tailoring Due Diligence
Business units, whether they
be unincorporated divisions or
separate subsidiaries, are typically
dependent in some fashion on
their parent or afliates and are
therefore seldom able to operate
as self-sufcient companies. Pro-
spective buyers must constantly
keep this reality in mind when tailoring due diligence
for such transactions.
First, the business units fnancial statements, to
the extent historical fnancials are even available, may
be incomplete and unaudited, and consequently may
not provide a true picture of the units fnancial posi-
tion and performance. Accounting adjustments, such
as allocation of overhead, may not properly refect
business realities. Related-party transactions, such as
the leasing of real property, the provision of raw ma-
terials or services, and the purchase of the units fn-
ished goods, can also dramatically impact operating
results and therefore must be closely examined. Even
external payables and receivables may be intermingled
with other members of the consolidated group and
not allocated. Such shortcomings and the lack of Sar-
banes Oxley-mandated procedures and controls may
pose problems for buyers that are public or plan to
become public.
Tere may also be group li-
abilities for which the business
unit is and may continue to be li-
able on a joint and several basis,
such as those associated with pen-
sion plans, tax liabilities, environ-
mental liabilities and borrowings
under credit facilities. Te buyer
must identify all such potential
liabilities and, unless it is willing
to assume them, either eliminate
them or secure satisfactory in-
demnifcation from the seller.
From an operational perspec-
tive, it is imperative that the buyer
identify and understand all the
group support functions that will
disappear once the transaction
closes and what it will take to re-
place them, especially if the business is operating on
a standalone basis post-closing. In addition to typical
accounting, legal and IT support, examples include
insurance coverage, letters of credit, beneft plans, en-
Dennis J. White
Acquiring a corporate subsidiary or business unit can
present as many chaIIenges as opportunities
Dennis White
terprise-wide licenses of mission critical software, and
the usage of telecommunications systems.
In short, the buyer must carefully assess what is
needed to operate the business successfully and how
many of those necessary elements will actually be ac
quired, and how many the buyer must itself supply or
purchase from external sources.
Structuring the Transaction
If the seller has structured the business unit disposi
tion as an asset sale, the buyer must ensure that it is ac
quiring all the assets necessary to operate the business.
Te buyer should likewise confrm that no extraneous
unneeded assets or liabilities have been gratuitously in
cluded by the seller. As in any asset purchase, the seller
should take care as to what liabilities it is expressly as
suming as well as any liabilities that might be imposed
upon a successor owner by operation of law.
If the transaction has been structured as a sale
of a subsidiary, particularly a recently formed entity
into which the seller has dropped operating assets,
the buyer must resist the temptation to assume that
it is acquiring a self-sufcient entity. As in any stock
acquisition, buyer must be particularly careful that in
acquiring all the equity, it is not unwittingly assuming
unwanted liabilities.
Depending on the relative bargaining strength of
the parties and the number of bidders vying for the
business unit, the corporate seller may resist a pro
spective buyers eforts to cherry pick assets and liabili
ties and insist that the buyer take the mix of assets and
liabilities chosen by the seller.
From a tax perspective, an asset purchase allows
the buyer to write up its tax basis in the acquired as
sets to their purchase price, thereby yielding the buyer
tax benefts derived from higher levels of depreciation
in the ensuing years. Te sale of a subsidiary will yield
the same result if the seller ofers or can be persuaded
to fle a so-called Section 338(h)(10) election under
the Internal Revenue Code. Te result is that the
transaction will be treated as stock sale for corporate
purposes, but in general as an asset sale with a basis
step-up for tax purposes. If the seller is unwilling to
agree to a Section 338(h)(10) election, then the buyer
should adjust its valuation of the business to refect
the tax benefts not being realized.
Negotiating Deal Terms
When it comes time to negotiate the terms of the
034_MAJNov10 1 10/8/2010 8:38:43 PM
Guideposts for a Carveout
be incomplete and unaudited, and consequently may
not provide a true picture of the units fnancial posi-
tion and performance. Accounting adjustments, such
as allocation of overhead, may not properly refect
business realities. Related-party transactions, such as
the leasing of real property, the provision of raw ma-
terials or services, and the purchase of the units fn-
ished goods, can also dramatically impact operating
results and therefore must be closely examined. Even
external payables and receivables may be intermingled
with other members of the consolidated group and
not allocated. Such shortcomings and the lack of Sar-
banes Oxley-mandated procedures and controls may
pose problems for buyers that are public or plan to
Tere may also be group li-
abilities for which the business
unit is and may continue to be li-
able on a joint and several basis,
such as those associated with pen-
sion plans, tax liabilities, environ-
mental liabilities and borrowings
under credit facilities. Te buyer
must identify all such potential
liabilities and, unless it is willing
to assume them, either eliminate
them or secure satisfactory in-
demnifcation from the seller.
From an operational perspec-
tive, it is imperative that the buyer
identify and understand all the
group support functions that will
disappear once the transaction
closes and what it will take to re-
place them, especially if the business is operating on
a standalone basis post-closing. In addition to typical
accounting, legal and IT support, examples include
insurance coverage, letters of credit, beneft plans, en-
Acquiring a corporate subsidiary or business unit can
terprise-wide licenses of mission critical software, and
the usage of telecommunications systems.
In short, the buyer must carefully assess what is
needed to operate the business successfully and how
many of those necessary elements will actually be ac-
quired, and how many the buyer must itself supply or
purchase from external sources.
Structuring the Transaction
If the seller has structured the business unit disposi-
tion as an asset sale, the buyer must ensure that it is ac-
quiring all the assets necessary to operate the business.
Te buyer should likewise confrm that no extraneous
unneeded assets or liabilities have been gratuitously in-
cluded by the seller. As in any asset purchase, the seller
should take care as to what liabilities it is expressly as-
suming as well as any liabilities that might be imposed
upon a successor owner by operation of law.
If the transaction has been structured as a sale
of a subsidiary, particularly a recently formed entity
into which the seller has dropped operating assets,
the buyer must resist the temptation to assume that
it is acquiring a self-sufcient entity. As in any stock
acquisition, buyer must be particularly careful that in
acquiring all the equity, it is not unwittingly assuming
unwanted liabilities.
Depending on the relative bargaining strength of
the parties and the number of bidders vying for the
business unit, the corporate seller may resist a pro-
spective buyers eforts to cherry pick assets and liabili-
ties and insist that the buyer take the mix of assets and
liabilities chosen by the seller.
From a tax perspective, an asset purchase allows
the buyer to write up its tax basis in the acquired as-
sets to their purchase price, thereby yielding the buyer
tax benefts derived from higher levels of depreciation
in the ensuing years. Te sale of a subsidiary will yield
the same result if the seller ofers or can be persuaded
to fle a so-called Section 338(h)(10) election under
the Internal Revenue Code. Te result is that the
transaction will be treated as stock sale for corporate
purposes, but in general as an asset sale with a basis
step-up for tax purposes. If the seller is unwilling to
agree to a Section 338(h)(10) election, then the buyer
should adjust its valuation of the business to refect
the tax benefts not being realized.
Negotiating Deal Terms
When it comes time to negotiate the terms of the
transaction, a buyer of a business unit must be sensi-
tive to the peculiar aspects of a business unit sale that
should be refected in the acquisition agreement.
First and foremost, there is the issue of price. As
noted above, it may be difcult to get a frm handle
on the business units proftability given the lack of
audited fnancials. Also, the buyer must take into ac-
count support services that it might have to furnish at
its own expense in order to maintain operations. All
this makes pricing of such transactions particularly
difcult. Te buyer will also need to gauge the corpo-
rate sellers focus on speed and certainty of closing if
it is to diferentiate itself from the competition. Most
corporate sellers will not be keen on earnouts, seller
paper and indemnifcation escrows.
Tere are often lengthy discussions regarding what
representations the seller is willing to make regarding
the fnancial statements and whether the seller will be
required to upgrade the quality of the fnancial state-
ments.
Also important are representations as to the ad-
equacy of the assets and potential joint and several
liability with regard to tax, ERISA and environmental
liabilities.
Certain third-party consents may be required, such
as consent of the sellers senior lenders and release of
the business units assets from the lien of the credit
facility. If the business unit has important contracts
with change-in-control termination triggers, consents
must be obtained or the contracts renegotiated.
If the name of the business unit or its products
is to change, the parties must address the logistics of
how and over what time period signage and labeling
on everything from buildings to instruction manuals
will be updated. Te buyer may need an interim li-
cense to use the old name for limited purposes during
a transitional period.
Post-Closing Obligations
Te unique nature of corporate business unit
dispositions will often heighten the importance of
post-closing obligations between the parties. Vendor
and customer agreements, non-compete clauses, and
non-solicitation provisions are a few areas worthy of
focus.
Te unit, for instance, may have transacted sig-
nifcant business with other operations of the seller.
Raw materials or component parts may be two ex-
amples. Or the seller may be a signifcant customer of
The corporate
seller may re-
sist a prospec-
tive buyer's
efforts to cher-
ry pick assets
and liabilities.

035_MAJNov10 2 10/8/2010 8:39:00 PM
Guest Article
the business units fnished goods and services. While
a member of the consolidated group, such arrange-
ments may have been transacted on an open account
basis and not reduced to a written contract. A buyer
in such circumstances, however, will have a strong
interest in formalizing such arrangements since they
may signifcantly impact the continuing proftability
of the business unit. Also, the pricing of such inter-
company arrangements may not necessarily refect
current market conditions and so a buyer should care-
fully examine them and, when appropriate, seek to
negotiate such terms.
Trade secrets are also an important component.
Information pertaining to the business unit may be
spread throughout the sellers corporate group. Be-
yond the normal confdentiality covenants, the buyer
may have a keen interest in requiring the seller to col-
lect and destroy all such information.
Te scope of non-competition covenants, mean-
while, can also require extensive negotiation. Te
seller may still have other operations in the same
space, or not wish to curtail its ability to expand into
or make acquisitions in the same space. Te buyer, on
the other hand, does not want to pay for the business
unit only to discover that the seller is soon competing
with its former subsidiary. Non-solicitation agree-
ments are another consideration. Many employees of
the business may have over the years developed close
ties with others in the sellers group. Te buyer does
not want to risk losing key employees of the newly ac-
quired business unit to the seller. Te buyer will want
to impose tight non-solicitation obligations on the
seller and perhaps non-competition obligations on its
new key employees.
Access to corporate records can also come up, as
the new owner of the business unit may need ac-
cess to income tax, sales tax, and other records in the
event that there are tax audits or other governmental
requests for information that pertain to periods prior
to the closing.
Transitional Services Agreement
Sometimes, a business unit is highly dependent
upon the seller for certain services that are critical to
its operations, and the buyer is not in a position to
supply or externally secure those services at closing,
particularly if the closing is on a fast time track. In
such circumstances, the parties must negotiate a tran-
sitional services agreement or TSA under which the
seller will provide services for a limited time.
From the sellers point of view, it is a necessary
accommodation to get the deal done, but the seller
would prefer to move on and focus on its core busi-
ness. From the buyers point of view, the securing of
such transitional services is essential to maintaining
the going enterprise value of the business unit.
Negotiation of a TSA is driven by deal timing con-
siderations, the capabilities and resources of the busi-
ness unit and the buyer, and, as is always the case, the
relative bargaining strength of the parties. A negoti-
ated TSA will commonly address a number of issues.
Te buyer, based on its due diligence fndings and
its own internal capabilities, is typically the party that
drives what services will be included in the TSA. Te
following are among the services commonly included:
use of real estate, warehousing, distribution and pro-
curement, data processing, telecommunications, em-
ployee benefts, fnance and accounting, and training.
Te seller must be sensitive to whether there are third
party contractual restrictions (e.g., software license
agreements) on its ability to provide services to a busi-
ness unit that post-closing is an unrelated party.
Moreover, the buyer will want to ensure that the
duration of the transitional services arrangement is
sufcient and that it is not left high and dry. Similar-
ly, the buyer will resist any right of the seller to termi-
nate the arrangement prematurely. In fact, the buyer
may seek certain rights of extension if the transition
takes longer than expected. Te seller is apt to resist
such extension rights.
Pricing can also warrant negotiation. Services can
be priced on a service-by-service basis or at a fat rate.
Te pricing levels may increase for any extended term
so as to serve as an incentive to the buyer to complete
the transition.
Te buyer may also ask that the business unit be
treated the same as sellers other business as to the
quality of services and timeliness. Because the seller
is providing such services as an accommodation and
not as a primary proft center, it may insist upon a
generally lower level of care (e.g., breach for only gross
negligence and willful misconduct) than is customary
in a typical commercial arrangement.
Dennis J. White is senior counsel in the Boston ofce of
McDermott Will & Emery LLP and Immediate Past
Chairman of the global board of directors of the As-
sociation for Corporate Growth.
The seller
would prefer to
move on and
focus on its
core business.

036_MAJNov10 3 10/8/2010 8:39:01 PM
People
Investment Bankers Move Around
Advisers seemed to be in demand as summer turned to fall, plus other
personnel moves
The investment banks were active hiring to start the fall,
as Dahlman Rose, Imperial Capital, Jefferies, Lazard and No-
mura, among others recruited senior level talent to fll out
their ranks. Signs that private equity fundraising is starting
to come to life could be seen in Perseus LLCs hiring of Sh-
eryl Schwartz, who arrived from TIAA CREF, and Pantheon
Ventures appointment of Elevation Partners Kevin Albert
as managing director. Angelo Gordon also made a Sydney
appointment to bolster its relationships with Australian and
New Zealand institutional investors, while the Raine Group
revealed some new hires when it fled a frst close for the mer-
chant banks debut fund.
3i Group The UK-based investment frm
will rollup its buyout business and its growth
capital arm into a unifed private equity plat-
form as senior executive Jonathan Russell
departs.
The integrated business will give 3i two
individual business segments: infrastructure
and private equity. The frm will continue to
explore expansion into bordering areas, in-
cluding debt management.
In the process, Russell, 3is managing
partner of its buyouts division, decided to call
it quits after 24 years. He joined the private
equity group in 1986 and became responsible
for more than 5 billion ($6.5 billion) of funds
in 1999 when he took on the role of head of
buyouts.
Amalgamated Bank The commercial
bank is suddenly a player in the asset-backed
lending game, as the frm hired Robert Love
to oversee a new ABL platform. The new group
will target middle-market opportunities, f-
nancing businesses with revenues of between
$50 million and $200 million.
Love was appointed an executive vice
president at the frm and director of Amalgam-
ated Business Credit. For the past decade,
Love has worked at GE Commercial Finance,
CIT Group and, most recently, at Royal Bank
of Scotland. Over that time, he originated more
than $2 billion in ABL transactions.
The new group, according to Amalgam-
ated president and CEO Derrick Cephas
was created to complement Amalgamated
Capital, which was formed roughly a year ago,
with Churchill Capital vet Tim Clifford leading
the senior lending group. Subsequent hires
included the additions of Sean McKeever,
George Parry and Mindy Naylor.
The new ABL group will be looking to
commit between $5 million and $15 million
per transaction, with funding going toward
working capital, business expansion, M&A,
turnarounds and refnancings.
Angelo Gordon & Co. The alternatives
investor established a Sydney offce, bringing
in Phillip Filippelis to serve as a manag-
ing director in the new location. He is being
counted on to head up business development
efforts in Australia and New Zealand as Angelo
Gordon looks to reach out to institutional in-
vestors in the region.
Filippelis was most recently at Societe
Generale Asset Management and its affliate
Trust Company of the West. There he over-
saw the institutional business in Australia and
Southeast Asia.
Angelo Gordon operates in the dis-
tressed debt and leveraged loan markets; real
estate; private equity and special situations;
and also runs a multi-strategy hedge fund. The
frm, with $23 billion under management, is
based in New York, but has international of-
fces in London, Hong Kong, Seoul, Shanghai
and Tokyo.
Arcapita Bank The Bahrain-based invest-
ment frm hired Charles Ward III as chief in-
vestment offcer, a new position at the frm.
The hiring comes as Arcapita looks to in-
corporate fund investments alongside its tradi-
tional direct investment model. Arcapita chief
executive offcer Atif Abdulmalik said in a
statement the effort will allow the frm to target
a greater proportion of institutional investors.
Ward was formerly a president at Lazard.
He joined the bank in 2002 and three years
later also assumed the role of chairman of
Lazards asset management group. Before that,
Ward put in an eight-year stint at Credit Su-
isse, where he ran its global investment bank-
ing and private equity businesses.
In his new role, Ward will also serve as
the president of private equity and infrastruc-
ture.
The Carlyle Group The global PE shop
said it hired Rodney Cohen as a managing
director and head of the frms new US equity
opportunity team.
The group will make control, joint-con-
trol and structured minority investments of up
to $150 million across a range of industries
and opportunities, including smaller buyouts,
corporate divestitures, corporate partnerships
and platform build-ups.
Cohen was previously with Pegasus
037_MAJNov10 1 10/8/2010 8:39:46 PM
companies. Before that, Spain was a managing
director on the M&A team of UBS Investment
Bank where he launched and ran the frms
Sales and Divestitures Group. He also put in a
stint at Donaldson, Lufkin, and Jenrette.
Spain will work out of Imperials Los An
geles offce.
Separately, the frm also named former
Jefferies banker
leveraged fnance. Zolkin, who will work in the
banks Los Angeles headquarters, also holds
the title of managing director. He was most
recently a managing director and co-founder
of the debt capital markets group at Global
Hunter Securities.
Previously, he was a senior banker in lev
eraged fnance with Jefferies.
People
Capital Advisors, where he was a co-manag-
ing partner.
Cohen will be based in New York. He re-
ports to Carlyle chief investment offcer Wil-
liam Conway.
Carlyle said its new equity opportunity
team will have Brooke Coburn as its deputy
head. Coburn, the head of Carlyles US growth
capital team, will maintain his current position
overseeing three funds with $1.4 billion in
committed capital.
Dahlman Rose & Co. The investment
bank has appointed Erik Codrington as
managing director for project fnance, effective
immediately.
Codrington, 46, will support the frms in-
vestment banking practice by providing debt-
related advisory and placement services to
corporate clients. Dahlman Rose, a New York
investment bank, focuses on natural resources
and transportation.
Codrington has more than 18 years of
experience in advising and obtaining debt f-
nancing for various companies in global sup-
ply chain industries including power, oil and
gas, chemicals and infrastructure. Previously,
he was a fnancial advisor to the US Depart-
ment of Energys loan guarantee program of-
fce, where he worked across the renewable,
clean technology, biofuels and advanced fossil
fuel sectors.
He has also worked at Citigroup and JPM-
organ, providing advisory and debt fnancing
services for more than 50 global transactions.
Before his career on Wall Street, Codrington
was an offcer in the US Navy.
FASB The nations top accounting standard
setter is retiring. Robert Herz, the chairman
of the Financial Accounting Standards Board,
announced that he will step down after eight
years.
Leslie Seidman, a FASB board mem-
ber since 2003 and a former JPMorgan Chase
accounting policy vice president, was appoint-
ed acting chairman.
The personnel change comes at a crucial
moment for the FASB, which came under an
unprecedented amount of political pressure in
the wake of the fnancial crisis to revisit rules
on fnancial instrument valuations. The head-
winds have come as the board is also trying to
stay on track with plans to converge US and
foreign standards for corporate accounting.
During Herzs stewardship, FASB un-
veiled FAS 157, which was targeted by law-
makers blaming the move to market-to-market
accounting for the volatility of the fnancial
system.
The Financial Accounting Foundation,
which oversees the FASB and selects its board,
also announced it will expand the FASB by two
members to return to the seven-member board
structure that was in place until 2008. The pro-
cess of recruiting and evaluating candidates is
expected to be fnished in early 2011.
Genstar Capital LLC The middle-market
private equity frm has appointed David Gol-
de and Brett Shobe as senior associates.
They will help the frm pursue acquisition
and investment opportunities.
Golde rejoins Genstar after earning his
masters in business administration from Stan-
fords Graduate School of Business. Shobe
joins Genstar after serving as an associate with
private equity and venture capital investment
frm Austin Ventures.
Guggenheim Partners LLC The invest-
ment frm hired Dorothy Mattison as a se-
nior managing director to focus on building
and strengthening companies it owns.
Mattison most recently the senior
vice president of Wal-Marts apparel global
merchandising center reports to managing
partner Todd Boehly.
At Wal-Mart, Mattison was responsible
for all product strategy, design, development,
sourcing, production and brand management
for Wal-Marts portfolio of private apparel
brands. She also led the relocation and build-
out of Wal-Marts apparel operation when the
business moved to New York City in 2007.
Imperial Capital The investment bank
used M&A to bolster its ranks throughout the
downturn. This time, the Los Angeles-based
investment bank is going the traditional route,
hiring Matthew Spain as a managing direc-
tor at the frm.
Spain arrives from private equity frm The
Gores Group, where he was tasked with help-
ing oversee M&A efforts for Gores portfolio
BDO Capital Advisors
Bob Snape joined the frm as a managing director in BDOs Boston offce. He ar-
rives from Scott-Macon Ltd., where he oversaw the
consumer and retail investment banking practice.
Before that, Snape was a managing director
and senior investment banker in Banc of Amer-
ica Securities global M&A group. He was also a
founding offcer and managing director of Fleet Se-
curities Fleet M&A Advisors, and put in stints at
KPMG, JPMorgan and The Vista Group, where he
began his career.
According to a press release, Snapes specialty
is strategic sale transactions, leveraged recaps,
divestitures, taking privates and management buy-
outs. He also has experience on cross-border deals,
private placements and ESOPs.
Bob Snape
038_MAJNov10 2 10/8/2010 8:39:19 PM
companies. Before that, Spain was a managing
director on the M&A team of UBS Investment
Bank where he launched and ran the frms
Sales and Divestitures Group. He also put in a
stint at Donaldson, Lufkin, and Jenrette.
Spain will work out of Imperials Los An-
geles offce.
Separately, the frm also named former
Jefferies banker Jeff Zolkin as its head of
leveraged fnance. Zolkin, who will work in the
banks Los Angeles headquarters, also holds
the title of managing director. He was most
recently a managing director and co-founder
of the debt capital markets group at Global
Hunter Securities.
Previously, he was a senior banker in lev-
eraged fnance with Jefferies.
Jefferies The investment bank announced
the addition of Abid Rizvi as a managing di-
rector in its global mergers and acquisitions
group, focused on the consumer sector. Rizvi
will work in New York.
With more than 15 years of investment
banking experience, Rizvi joins from Sagent
Advisors, where he headed the consumer
products group. Previously, he spent nine
years at Merrill Lynch, most recently as a
managing director in the consumer products
investment banking group.
Keefe, Bruyette & Woods The listed,
New York investment bank added Stephen
Howard as co-head of its European invest-
ment banking segment and along with the
promotion announced plans for expansion in
London.
Along with Howards promotion, Keefe,
Bruyette & Woods added corporate fnance vet
Nick Triggs as co-head of European invest-
ment banking. Triggs formerly served as head
of European investment banking at Fox-Pitt,
Kelton Ltd.
Lazard The frm said Masato Marumo
joined the frm as a managing director within
its investment banking group.
Marumo, based in Tokyo, joins from Car-
lyle where he was a partner and managing di-
rector of Carlyle Japan Partners. Before joining
Carlyle in 2001, Marumo spent ten years with
the Industrial Bank of Japan.
private equity and venture capital investment
The invest-
Dorothy Mattison as a se-
nior managing director to focus on building
and strengthening companies it owns.
Mattison most recently the senior
vice president of Wal-Marts apparel global
merchandising center reports to managing
At Wal-Mart, Mattison was responsible
for all product strategy, design, development,
sourcing, production and brand management
for Wal-Marts portfolio of private apparel
brands. She also led the relocation and build-
out of Wal-Marts apparel operation when the
business moved to New York City in 2007.
The investment bank
used M&A to bolster its ranks throughout the
downturn. This time, the Los Angeles-based
investment bank is going the traditional route,
as a managing direc-
Spain arrives from private equity frm The
Gores Group, where he was tasked with help-
ing oversee M&A efforts for Gores portfolio
joined the frm as a managing director in BDOs Boston offce. He ar-
rives from Scott-Macon Ltd., where he oversaw the
consumer and retail investment banking practice.
Before that, Snape was a managing director
and senior investment banker in Banc of Amer-
ica Securities global M&A group. He was also a
founding offcer and managing director of Fleet Se-
curities Fleet M&A Advisors, and put in stints at
KPMG, JPMorgan and The Vista Group, where he
According to a press release, Snapes specialty
is strategic sale transactions, leveraged recaps,
divestitures, taking privates and management buy-
outs. He also has experience on cross-border deals,
039_MAJNov10 3 10/13/2010 12:31:49 PM
improvement in operating performance over
recent quarters; and (ii) selectively invest cap
ital into new opportunities. Until the fundrais
ing environment improves and middle-market
frms have more access to capital, which
manifests itself in either (i) larger fund sizes;
(ii) faster deployment of capital and higher
turnover of funds; or (iii) both; its unlikely that
GPs will drastically increase in size. With that
said, job prospects for recent MBA graduates
tend to be most promising for candidates with
sector-specifc operating experience, rather
than simply backgrounds in fnance, broadly
defned as consulting, banking, etc. Those
candidates tend to offer the most in terms of
potential to help management teams create
value within existing portfolio companies or
develop unique views into investment oppor
tunities within their feld of expertise.
U.S. middle-market companies have
emerged from the recession in reasonably
good shape. Taking 2005 (before the sub-
percent. The amount of cash and equivalents
plus short-term investments held by the typical
middle-market company was up 54 percent as
of fscal years ended 2009 and remained up 48
percent as of mid-2010. All this bodes well for
middle-market job growth and M&A activity.
According to Bloomberg data, total M&A deal
volume in the U.S. came in at $1,355 billion in
2005 and has recovered to only $800 billion in
We see increased M&A activity especially
from European middle-market, privately held
companies seeking to acquire select asset
classes and distribution channels from fnan-
cially distressed U.S.
companies. Typi-
cally, these transac-
tions also involve a
recapitalization of
the U.S. target, thus
jobs are maintained
and created. We
see this trend as
continuing so long
as (i) the euro/U.S.
dollar exchange rate
remains on current levels, (ii) U.S. assets in
manufacturing and distribution remain attrac-
tively priced and (iii) key European economies
with a strong manufacturing base, such as
Germany and Italy, continue to remain export
driven.
Matteo Daste, Shareholder,
Buchalter Nemer
Middle-market company hiring remains
slow. Executives feel more positive about the
economy than they did two years ago, but an
uncertain environment is hurting a signif-
cant recovery in middle-market hiring. Many
companies are liquid and bank credit activity
appears to be loosening up, but hiring has
not improved substantially. This is frustrat-
ing because many executives see the need
to hire employees now. The main problem is
the stagnant economy that has resulted from
a confusing and uncertain governmental and
legislative picture. The lack of substantial
M&A activity is a factor, but this is also a
consequence of this
governmental and
legislative confu-
sion. Middle-market
executives want cer-
tainty even if its
bad news, they want
to know it so they
can plan for it. This
is especially true
given that some very
expensive aspects
of the governmental landscape (e.g., health
care and taxes) remain unclear. The specter
of a double-dip recession also contributes to
this lack of hiring. Unfortunately, these fac-
tors lead to a negative hiring environment
for MBA graduates. This hiring environment
could improve quickly, but this economic un-
certainty must be cleared up frst.
Robert C. White, Jr., Shareholder,
Gunster
Firms are gearing up to meet heightened
product and services
demand already. In
fact, it has been hap-
pening for the last
nine months. The
only problem is the
hires are temporary
for now. As demand
grows, most com-
pany executives are
going to be cautious
and meet that demand with fexible resource
options to make sure they arent committing
long-term capital to what could be feeting
demand. Should the demand sustain itself,
they will convert these temporary resources
to permanent positions. Its more tied to
the fact that U.S. companies have already
squeezed out as much productivity gains as
they can and simply need to hire more re-
sources. The prospects for MBAs may be a bit
weaker. There is always a market for the best
and brightest, and they will get hired no mat-
ter what. But not everyone is going to get that
dream job they desired when they enrolled in
business school.
Jim Dimitriou, Managing Partner,
Tatum LLC
While a furry of transaction activity in the
second half of calendar year 2010 has certainly
flled deal pipelines at middle-market buyout
frms and increased
capacity utilization
amongst deal-doing
investment profes-
sionals, an uptick in
hiring has yet to take
place. Outside of the
typical two- or three-
year cycle hires
(pre-MBA analysts
and associates), it
seems most middle-
market private equity frms feel as though
they have adequate resources in the post-
MBA ranks to (i) manage existing portfolio
companies, which have experienced marked
Got Jobs?
Dealmakers weigh in on the current employment landscape and what the prospects look like for
job seekers and recent MBA grads
THE PULSE
Jim Dimitriou
Matteo Daste
Robert C. White, Jr.
Jack Purcell
Robert Comment
040_MAJNov10 3 10/8/2010 8:39:44 PM
improvement in operating performance over
recent quarters; and (ii) selectively invest cap-
ital into new opportunities. Until the fundrais-
ing environment improves and middle-market
frms have more access to capital, which
manifests itself in either (i) larger fund sizes;
(ii) faster deployment of capital and higher
turnover of funds; or (iii) both; its unlikely that
GPs will drastically increase in size. With that
said, job prospects for recent MBA graduates
tend to be most promising for candidates with
sector-specifc operating experience, rather
than simply backgrounds in fnance, broadly
defned as consulting, banking, etc. Those
candidates tend to offer the most in terms of
potential to help management teams create
value within existing portfolio companies or
develop unique views into investment oppor-
tunities within their feld of expertise.
Jack Purcell, Principal,
Ridgemont Equity Partners
U.S. middle-market companies have
emerged from the recession in reasonably
good shape. Taking 2005 (before the sub-
prime bubble) as the
base year, average
revenue among the
non-fnancial compa-
nies in the S&P 400
MidCap Index was
up 20 percent by
2009 and Ebitda was
up 18 percent. The
average number of
employees per com-
pany was up only 5
percent. The amount of cash and equivalents
plus short-term investments held by the typical
middle-market company was up 54 percent as
of fscal years ended 2009 and remained up 48
percent as of mid-2010. All this bodes well for
middle-market job growth and M&A activity.
According to Bloomberg data, total M&A deal
volume in the U.S. came in at $1,355 billion in
2005 and has recovered to only $800 billion in
2009 and $940 billion (annualized) during the
frst half of 2010. In comparison, after factor-
ing in the growth in revenue and Ebitda for
middle-market companies since 2005, M&A
volume should be running at around $1,600
billion per year (118 percent of $1,355 billion).
In other words, M&A activity is running at
around 60 percent of expected levels, leaving
much room for expansion.
Robert Comment, PhD, Professor,
The Johns Hopkins Carey Business School
It is important to remember that the re-
sponse depends on the market being consid-
ered. For example, the defnition of middle
market is different in India than in the U.S.
This also holds true
for the dynamics of
mature and not-so-
mature (emerging
economy) employ-
ment markets. As it
pertains to the U.S., it
is clear today that the
employment frame-
work there (middle
market or otherwise)
is emerging from a
structural change triggered by the severe re-
cession. This will require middle-market com-
panies (especially those that have insuffcient
operating leverage) to keep their fxed costs
to a minimum and maximize their variable
costs to manage cyclical swings that seem to
have become sharper, more frequent and less
predictable. This is the new paradigm regard-
less of M&A activity levels. Increased M&A
activity levels could affect the middle-market
employment picture both favorably and unfa-
vorably--usually unfavorably because of the
need to eventually demonstrate synergies,
cut costs, and the fact that most mergers fail
because organizational and cultural integra-
tion is poorly executed. Middle-market com-
panies usually achieve high growth rates in
economic recoveries.
Fundamentally, this is what generates em-
ployment growth. Not M&A activity levels.
Besides, employment will become diffcult to
measure and defne in the future, and will likely
mean modular, fexible, virtual work arrange-
ments, where an employee is a free agent.
Mahesh Krishnamurti, Managing Director,
Resources Global Professionals, India
In the last fve months we have seen posi-
tive signs for middle-market employment.
Much of the growth is tied to an increase in
M&A activity as companies are hiring staff
to support integra-
tion and IPOs. In
some respects, we
are further along
at this point in the
recovery than we
have been at similar
points in past recov-
eries. Historically,
permanent place-
ment has emerged
more slowly than
our temporary and consulting operations,
and today it is leading the way as frms that
cut staff levels so deeply have been forced to
reinstate positions. Were also seeing conf-
dence levels on the rise. According to Robert
Halfs Professional Employment Report, 86
percent of executives are confdent about
their frms growth plans for Q4. High conf-
dence translates to job creation.
Recent MBA grads may face greater chal-
lenges breaking into these higher-level roles.
With so many qualifed people looking for work,
the hiring process remains very competitive.
Also, salary expectations have not been
adjusted in the minds of some grads. New
hire compensation levels at some frms have
normalized and signing bonuses are not as
prevalent.
Maria Ebel, Regional Vice President,
Robert Half Management Resources
THE PULSE
and meet that demand with fexible resource
options to make sure they arent committing
long-term capital to what could be feeting
demand. Should the demand sustain itself,
they will convert these temporary resources
to permanent positions. Its more tied to
the fact that U.S. companies have already
squeezed out as much productivity gains as
they can and simply need to hire more re-
sources. The prospects for MBAs may be a bit
weaker. There is always a market for the best
and brightest, and they will get hired no mat-
ter what. But not everyone is going to get that
dream job they desired when they enrolled in
Jim Dimitriou, Managing Partner,
Tatum LLC
While a furry of transaction activity in the
second half of calendar year 2010 has certainly
flled deal pipelines at middle-market buyout
frms and increased
capacity utilization
amongst deal-doing
investment profes-
sionals, an uptick in
hiring has yet to take
place. Outside of the
typical two- or three-
year cycle hires
(pre-MBA analysts
and associates), it
seems most middle-
market private equity frms feel as though
they have adequate resources in the post-
MBA ranks to (i) manage existing portfolio
companies, which have experienced marked
Dealmakers weigh in on the current employment landscape and what the prospects look like for
Robert Comment
Mahesh Krishnamurti
Maria Ebel
041_MAJNov10 4 10/8/2010 8:39:44 PM
though Ive also heard them referred to as
Generation Y or Z). My kids got their frst cell
phones at age 11. I got my frst cell phone at
age 33. My kids can choose from 500 chan
nels on cable, while I only had a choice of
three network channels. My kids have never
known the world without the Internet, which
didnt even exist for me until after my kids
were born. My kids can download music that
goes instantly to their iPods (and is charged
to my PayPal account). I had to save up to
go buy a record or go to the movie theater.
My kids have blown past email and prefer to
communicate via texting or Facebook. I didnt
get my frst email address until I was a man
aging director. My kids get driven to all their
activities. I rode my bike everywhere growing
up. I could go on and on, but I think the differ
ences are pretty clear.
I dont want to sound too much like one
of those I walked to school barefoot, uphill,
in the snow guys. There are some other dif
ferences that may prove quite benefcial. My
kids have been using computers their entire
lives. They have no fear of technology and
can fgure out how to use any application in
no time. They have been using PowerPoint,
with fancy graphics, since elementary school.
Through all their activities, they have per
formed on stage (including public speaking) in
front of hundreds of people since they were
four years oldthey dont have much stage
fright.
My kids have learned things in middle
school that I did not experience until high
school. They will take calculus and statistics
in high school. I wasnt offered those courses
until college. When my kids want data, they
spend 10 minutes on the Internet and quickly
fnd what they need.
M
y 16-year-old daughter is starting
to seriously consider her future
and a career. Over the past year,
shes been asking me about my career in in-
vestment banking and is now considering an
educational path that would ultimately lead
her into the M&A business. Somewhere in
these conversations, it hit me: Wow, what
will the M&A business look like when my
daughters generation starts working in this
business?
First, some historical perspective: Im a
baby boomer. My parents were Italian immi-
grants, and I grew up squarely in the middle
class. Born in the 60s and raised in the 70s,
I grew up in very dynamic times. Like most of
my contemporaries, I was rooted in the tradi-
tional values of my parents generation, while
at the same time, the 60s and 70s exposed
me to some dramatic changes in American
life. All of this framed who I was and how
I approached doing deals and pursuing my
career.
I started in the M&A business in 1990
after earning my MBA. Most of the senior
professionals I worked with had started do-
ing deals in the early- to mid-80s. Most of
these guys barely used a computerpaper,
pencil and an HP-12C were the primary tools
of the trade. Purchase agreements were
marked up by hand. Administrative assistants
did all the word processing. FedEx and fax
were the primary means of rapid communica-
tion. Data rooms were just thatrooms flled
with paper in fle cabinets. In the end, deals
still got done, but in ways that refected the
dealmakers. Take the traditional LBO; in the
early days, these deals were for asset-rich
manufacturing businesses with stable his-
tories and predictable futures. Good thing,
since deals could only get so complex given
the level of sophistication and the aggres-
siveness of dealmakers.
My generation was the frst generation
of dealmakers with any signifcant personal-
computing skills. We were also the frst gen-
eration that combined our PC skills with a
meaningful formal education in fnance and
transactions. As a result, I was considered
a rock star as a starting senior associate. I
was a spreadsheet whiz kid using Lotus 1-2-3
(which at the time was one big sheet with no
tabs) and writing tons of macros. I was also
the go-to resource for fancy charts, graphs and
presentations. That said, we had no Internet
or data services. If I had to do research, I put
on my University of Michigan sweatshirt and
went back to campus to use their research
tools. When we did valuation comps, they
were all hand-keyed from the 10-Ks/Qs and
S-1sthere was no automated data. When
we marketed a deal, we banged the phones.
When we had an issue with someone, we
called them or, dare I admit, met them face-
to-face.
Armed with technology, our generation
changed the industry with more sophistica-
tion in fnancial modeling, presentations and
the overall deal process. LBOs were not just
for traditional manufacturing businesses
any business became fair game. We could
now do all sorts of modeling and test alterna-
tive scenarios. Creative fnancing structures,
the roll-up, the poof IPO and equity-spon-
sored recapitalizations were all born in those
years. Leverage and valuation multiples also
got more aggressive.
So what can we expect in the future?
My kids were born in the mid- to late 90s.
I guess that makes them Millennials (al-
When Our Kids Take Over M&A
There is going to be a generational impact when the Millenials enter the deal market
COMMUNITY COMMENTARY
Jack F. DiFranco, Grant Thornton LLP
Jack F. DiFranco
What it will take to attract, train, motivate and retain this
generation will be different from what worked with us.
We were also the frst generation
that combined our PC skills with a
meaningful formal education in
042_MAJNov10 5 10/8/2010 8:40:23 PM
though Ive also heard them referred to as
Generation Y or Z). My kids got their frst cell
phones at age 11. I got my frst cell phone at
age 33. My kids can choose from 500 chan-
nels on cable, while I only had a choice of
three network channels. My kids have never
known the world without the Internet, which
didnt even exist for me until after my kids
were born. My kids can download music that
goes instantly to their iPods (and is charged
to my PayPal account). I had to save up to
go buy a record or go to the movie theater.
My kids have blown past email and prefer to
communicate via texting or Facebook. I didnt
get my frst email address until I was a man-
aging director. My kids get driven to all their
activities. I rode my bike everywhere growing
up. I could go on and on, but I think the differ-
ences are pretty clear.
I dont want to sound too much like one
of those I walked to school barefoot, uphill,
in the snow guys. There are some other dif-
ferences that may prove quite benefcial. My
kids have been using computers their entire
lives. They have no fear of technology and
can fgure out how to use any application in
no time. They have been using PowerPoint,
with fancy graphics, since elementary school.
Through all their activities, they have per-
formed on stage (including public speaking) in
front of hundreds of people since they were
four years oldthey dont have much stage
fright.
My kids have learned things in middle
school that I did not experience until high
school. They will take calculus and statistics
in high school. I wasnt offered those courses
until college. When my kids want data, they
spend 10 minutes on the Internet and quickly
fnd what they need.
So what will all this mean when my
daughter and her generation start working on
deals? Lets frst consider the deal process.
Maybe their short attention spans, need for
instant gratifcation, lack of patience and
technical profciency will combine to develop
a whole new way of doing
deals (think eBay + Capital IQ
+ PayPal = something new).
Perhaps their ability to multi-
task and fnd information will
create effciencies that will
streamline the process and get
deals done more quickly. May-
be the exceptional negotiating skills theyve
refned by the age of 12 will position them to
push for deal structures that were considered
unachievable in our time. Maybe, having lived
through this last recession, they will become
more conservative when it comes to leverage
and valuation.
What about the people? Will it be totally
alien to them when they have to pull an all-
nighter at the offce to fnish an offering mem-
orandum? Will they have the commitment and
work ethic to hop on planes at a moments
notice and give up their weekend plans to be
at a due diligence kickoff meeting? In terms
of communication, will they even be able to
write in complete sentences when theyve
spent most of their formative years commu-
nicating in sentence fragments while typing
with their thumbs? Will critical deal corre-
spondence be done via text messages? Will
deals get marketed on Facebook?
However the deal process changes, one
thing is certain: My kids generation is dif-
ferent and will need to be treated differently.
What it will take to attract, train, motivate
and retain this generation will be different
from what worked with us. There is some
great potential here for the industry to un-
dergo innovative changes the same way it
did when my generation came through. Just
like the baby boomers, they will make their
mark on the industry. It will be interesting to
watch these changes take place. Whatever
the outcome, deals will still get done. Just to
play it safe, I am still hanging on to my trusty
HP-12C!
Jack F. DiFranco is a National Managing Prin-
cipal in the Private Equity Services practice of
Grant Thornton LLP.
transactions. As a result, I was considered
a rock star as a starting senior associate. I
was a spreadsheet whiz kid using Lotus 1-2-3
(which at the time was one big sheet with no
tabs) and writing tons of macros. I was also
the go-to resource for fancy charts, graphs and
presentations. That said, we had no Internet
or data services. If I had to do research, I put
on my University of Michigan sweatshirt and
went back to campus to use their research
tools. When we did valuation comps, they
were all hand-keyed from the 10-Ks/Qs and
S-1sthere was no automated data. When
we marketed a deal, we banged the phones.
When we had an issue with someone, we
called them or, dare I admit, met them face-
Armed with technology, our generation
changed the industry with more sophistica-
tion in fnancial modeling, presentations and
the overall deal process. LBOs were not just
for traditional manufacturing businesses
any business became fair game. We could
now do all sorts of modeling and test alterna-
tive scenarios. Creative fnancing structures,
the roll-up, the poof IPO and equity-spon-
sored recapitalizations were all born in those
years. Leverage and valuation multiples also
So what can we expect in the future?
My kids were born in the mid- to late 90s.
I guess that makes them Millennials (al-
What it will take to attract, train, motivate and retain this
generation will be different from what worked with us.
We were also the frst generation
that combined our PC skills with a
meaningful formal education in
fnance and transactions.
On The Agenda
October 29, 2010
ACG Richmond: Corporate Develop-
ment Panel
November 3
ACG Charlotte: Michael Smith,
Charlotte Center City Partners
November 4
ACG Pittsburgh: Venkee Sharma,
Aquatech International, Inc.
November 5
ACG Chicago: Dollars & Census
Corporate Growth in a Changing
America
November 9
ACG Detroit: Keeping Up with the
Credit Markets
ACG Utah: Bill Haberstock, Million
Aire
November 10
ACG Central Texas: Brewster Mc-
Cracken, Pecan Street Project, Inc.
November 16
ACG Boston: Fall Conference 2010
Issues Facing Founder and Fam-
ily-Owned Businesses
ACG Calgary: Wilf Gobert, The
Fraser Institute
043_MAJNov10 6 10/8/2010 8:39:59 PM
T
hroughout our history as a long-es-
tablished name in the African-Ameri-
can hair care market, we at Johnson
Products take pride in our skills in offering our
customers the right product solution to solve
their hair care issues. But with our change in
ownership in 2007, we needed some expert
help in solving some of our own challenges.
Established in 1954, Johnson Products
became the frst minority-run enterprise to
be listed on the New York Stock Exchange.
For the next few decades, the company was
owned in turn by several major corporations,
most recently Proctor and Gamble.
Our big change came in 2007, when John-
son Products was acquired by RC Fontis, St.
Cloud Capital and Plus Factor, LLC. The new
company, headed by an African American
management team, was determined to re-
vive the established but fagging brand as
a private company with a focus on spurring
growth in our target markets without leaving
behind loyal customers. This challenge was
compounded by another: the need to quickly
replace a mature global infrastructure with a
business platform that could support our im-
mediate and long-term needsinstilling the
speed and fexibility we needed to compete
against much larger competitors while sup-
porting day-to-day operations.
The process felt, at the outset, much like
jumping on a moving train. Just as our hair
care products are tailored to the specifc
needs of our clientele, we needed to fnd
a solution which was specifcally tailored
to our business model. Johnson Products
needed an integrated and scalable ERP plat-
form to manage our business and grow both
our top and bottom lines. However, the cost,
complexity, and time required to implement
and support a traditional ERP system ft nei-
ther our budget, nor our need for fexibility.
Like using the wrong hair care product, ap-
plying the wrong ERP solution might make
our situation even worse. We didnt want to
compromise, settle for less powerful busi-
ness tools, or to allocate already scarce re-
sources away from serving our customers.
The SaaS (Software as a Service) delivery
model was an ideal ft for Johnson Products.
Without an existing IT department, we were
in a position to fully leverage the value of an
SaaS-based ERP solution like SAPs Business
ByDesign or other products. Our goals were
focused on speed and fexibility to support
plans for strategic growth.
We were able to deliver integrated end-
to-end business processes we needed to
build an effcient and effective global op-
eration. No upfront investment in hardware
and software meant we could dedicate more
capital to fueling growth. And most important
for our company the SaaS platform was fully
implemented in less than a month, meeting
the aggressive timeline of the investment
team without disrupting our customers.
With infrastructure in place, Johnson
Products was able to focus on serving cus-
tomers in emerging markets around the
world. Much of our future growth will come
from our enhanced ability to operate ef-
fectively in these marketsan ability sup-
ported by a quick, fexible, and expandable
ERP solution.
While the ease of implementation for
growth targets was a great selling point for
us, we also had a key goal of continuing to
serve our existing customer base. Our new
infrastructure allowed us the freedom to give
employees at all levels of the organization
real-time access to product and customer in-
formation allowed us to maintain and improve
upon the excellent level of service our cus-
tomers expect. And this goal was achieved.
Long term customers now report improved
satisfaction with our service response.
Johnson Products also now has added
control over and visibility into our supply
chain, product proftability, and distribution
channels. Our strong commitment to R&D
and market research is also well served. Us-
ing a SaaS platform has made it easier for
our company to analyze our sales pipeline
for new opportunities, accurately project
the proftability of new products, and opti-
mize capacity further enhancing our growth
in target markets. Johnson Products is ide-
ally positioned to retake the leadership
position in African American health and
beauty care.
SaaS: From Zero to Sixty
The Software as a Service delivery model ft our goals targeting speed and fexibility
Eric Brown, CEO, Johnson Products
No upfront investment in hardware and software meant
we could dedicate more capital to fueling growth.
044_MAJNov10 7 10/8/2010 8:40:00 PM
like to see it as low as possible.
Tere is evidence that break-up fees have been moving higher
in recent years. A survey conducted by investment bank Houlihan
Lokey revealed that breakup fees showed a mean of 3.5% of the
deals transaction value last year, up from 3.4% in 2008 and 3.1%
in 2007. Te highest fee documented was the 7.6% negotiated in
Insituform Technologies acquisition of Corrpro Companies.
While the growth in fees seems negligible, it may refect the
smaller deal sizes in 2009 compared to 2007, as larger deals tend to
yield lighter termination provisions on a percentage basis. An alter-
native theory is that in a buyers market, sellers need to up the ante
if theyre going to stimulate a bidding contest. Te reward, as 3Par
demonstrated, is the potential for a premium that outpaces any ex-
pectations.
Additional reporting by Ken MacFadyen
BREAK-UP FEES continued from page 12
impacted.
He takes it a step further, however, noting that fundamental
changes mean that the market is no longer available to true small-
cap plays. He cites Intel, which went public in 1971 generating $8
million in proceeds.
Tats not a deal that gets done today, he says.
But buyers increasingly recognize that they could be the benef-
ciary of these changes.
BACKLOG continued from page 16
what the exit is going to be, he says.
And sometimes the second bite of the apple can be as fulflling as
the frst. First Reserve discovered this with the recent sale of Dresser,
Inc. to General Electric in the frst week of October. Te frm was
an investor in the carveout of Dresser from Halliburton in 2001,
and then stayed on as an investor six years later when Riverstone and
Lehman Brothers acquired the company. Dressers $3 billion sale to
GE should reward First Reserve for its loyalty.
Additional reporting by Ken MacFadyen
NEW EQUITY continued from page 18
infrastructure fund of the ground.
Still, a few notable deals have been cinched in recent years, pro-
viding hope that the segment can still entice sponsors. Carlyles joint
venture in Project Service LLC, announced last December, is one of
the more interesting plays since the 2005 Chicago Skyway deal put
domestic infrastructure investments on the map. Carlyle, alongside
Subway Restaurants and other investors, entered into a 35-year pub-
lic-private partnership with Connecticut to redevelop, operate and
maintain 23 highway service areas across the state. Tis is exactly the
kind of brownfeld deal that initially appealed to investors.
According to Rabin, however, these types of opportunities have
been in short supply. Te credit markets have indeed had an impact.
In Chicago, for example, a $2.5 billion lease deal involving Midway
Airport fell apart when investors couldnt come up with the neces-
sary fnancing.
Ten there are the politics. Chicagos deal with Morgan Stanley to
lease its city parking meters is now facing criticism from opponents
upset with the profts going to the investors, according to an August
story in Bloomberg. It doesnt help that meter fees went up.
Rabin cites that the failure of the Midway transaction and the
political ramifcations of earlier brownfeld sales are having an im-
pact. She notes, though, that with regard to public-private partner-
ships, the US is still considered a fedgling market and that some
traction has been witnessed.
As cities like Los Angeles look to unload their non-core assets,
they will fnd buyers. But private equity, especially in the middle
market, will likely gravitate to shorter-term opportunities that pres-
ent identifable exit plans.
Goldman Sachs, in the last week of September, acquired an 80%
stake in the Spanish gas distribution network of Endesa, which has
the option to re-acquire the stake at a later date. Its recognition,
albeit a bit late, that realizations are what raise funds.
INFRASTRUCTURE continued from page 21
046_MAJNov10 8 10/12/2010 11:36:01 AM
Deal Flow
Enterprise Products Partners Enterprise GP Holdings LP 9/7 Electric, Gas, and Water Distribution 9,001
Unilever PLC Alberto-Culver Co 9/27 Soaps, Cosmetics, and Personal-Care Products 3,842
Goldcorp Inc Andean Resources Ltd 9/3 Mining 3,374
3G Capital Burger King Holdings Inc 9/2 Retail Trade-Eating and Drinking Places 3,302
Eldorado Gold Corp Andean Resources Ltd 9/2 Mining 3,225
7-Eleven Inc Caseys General Stores Inc 9/9 Retail Trade-Food Stores 2,054
Onyx Acquisition Corp Netezza Corp 9/20 Computer and Offce Equipment 1,931
Hewlett-Packard Co ArcSight Inc 9/13 Prepackaged Software 1,635
Hellman & Friedman LLC Associated Materials Inc 9/8 Metal and Metal Products 1,300
TransDigm Group Inc McKechnie Aerospace 9/27 Aerospace and Aircraft 1,270
SLM Corp Student Loan Corp-Loan Assets 9/17 Credit Institutions 1,200
Endo Pharmaceuticals Holdings Qualitest Pharmaceuticals Inc 9/28 Drugs 1,200
Safran SA L-1 Identity Solutions Inc 9/20 Business Services 1,130
ACE Ltd Rain & Hail Ins Svcs Inc 9/14 Insurance 1,100
Southwest Airlines Co AirTran Holdings Inc 9/27 Air Transportation and Shipping 1,042
Penn Virginia Resource Penn Virginia GP Holdings LP 9/21 Mining 957
Laboratory Corp of America Genzyme Genetics 9/13 Health Services 925
MedAssets Inc The Broadlane Group Inc 9/14 Health Services 850
Bristol-Myers Squibb Co ZymoGenetics Inc 9/7 Drugs 838
McMoRan Exploration Co Plains Expl,Prodn Co-Asts 9/20 Oil and Gas; Petroleum Refning 818
3M Co Arizant Inc 9/9 Measuring, Medical, Photo Equipment; Clocks 810
Avista Capital Holdings LP Clorox Co-Global Auto Care Bus 9/21 Soaps, Cosmetics, and Personal-Care Products 780
Inergy Midstream LLC Tres Palacios Gas Storage LLC 9/7 Transportation and Shipping (except air) 725
Protective Life Insurance Co United Investors Life Ins Co 9/14 Insurance 648
Hellman & Friedman Capital Internet Brands Inc 9/20 Business Services 640
Timmins Gold Corp Capital Gold Corp 9/27 Mining 600
Discover Finl Svcs Student Loan Corp 9/17 Credit Institutions 600
Freeport-McMoRan Copper & Gold McMoRan Exploration Co 9/20 Oil and Gas; Petroleum Refning 500
PAETEC Holding Corp Cavalier Telephone LLC 9/13 Telecommunications 460
Pittsburgh Parking Partners City of Pittsburgh,PA-Parking 9/21 Repair Services 452
Boston Scientifc Corp Asthmatx Inc 9/20 Measuring, Medical, Photo Equipment; Clocks 444
LS Power Equity Advisors PPL Corp-Cert Non-core 9/9 Electric, Gas, and Water Distribution 381
St Jude Medical Inc CardioMEMS Inc 9/7 Measuring, Medical, Photo Equipment; Clocks 375
PBF Holding Co LLC Valero Energy-Plant,Paulsboro 9/27 Oil and Gas; Petroleum Refning 360
GIC DQE Holdings LLC 9/29 Investment & Commodity Firms,Dealers,Exchanges 360
Danaher Corp Keithley Instr Inc 9/29 Measuring, Medical, Photo Equipment; Clocks 356
NRG Energy Inc Green Mountain Energy Co 9/16 Electric, Gas, and Water Distribution 350
US Department of Education Student Loan-Loan Assets 9/17 Credit Institutions 329
Noble Group Ltd RBS Sempra Commodities LLP-NA 9/20 Investment & Commodity Firms,Dealers,Exchanges 317
Sharp Corp Recurrent Energy Inc 9/21 Electric, Gas, and Water Distribution 305
BAE Systems Inc SpecTal LLC 9/20 Business Services 303
HarbourVest Partners LLC Arcapita Inc-Portfolio Cos(5) 9/27 Investment & Commodity Firms,Dealers,Exchanges 300
BioMed Realty Trust Inc Gateway Business Park 9/22 Real Estate; Mortgage Bankers and Brokers 298
Verifone Systems Inc Hypercom Corp 9/29 Computer and Offce Equipment 290
Septembers Key Deals
Target Price
Acquirer Target Date Industry ($mil)
047_MAJNov10 1 10/8/2010 8:40:17 PM
Deal Flow
UBM Canon Communications LLC 9/16 Printing, Publishing, and Allied Services 287
Mine Safety Appliance Co General Monitors Inc 9/7 Measuring, Medical, Photo Equipment; Clocks 280
Cole Credit Ppty Tr III Inc Albertsons LLC-Ret Ppty(33) 9/17 Retail Trade-Food Stores 276
Emdeon Inc Chamberlin Edmonds & Assoc Inc 9/7 Insurance 260
Sand Dollar Acquisition Corp Cellu Tissue Holdings Inc 9/16 Paper and Allied Products 247
Stericycle Inc Healthcare Waste Solutions Inc 9/29 Sanitary Services 245
Aquiline Capital Partners LLC CRT Capital Group LLC 9/1 Investment & Commodity Firms,Dealers,Exchanges225
CA Bridge Corp American Physicians Svc Grp 9/1 Insurance 222
Madison Dearborn Partners LLC Fieldglass Inc 9/27 Business Services 220
Thor Industries Inc Heartland Recreational 9/17 Transportation Equipment 209
KBS REIT II Inc Union Bank Plaza, LA 9/15 Real Estate; Mortgage Bankers and Brokers 208
Experian PLC Mighty Net Inc 9/21 Business Services 208
Equity Residential Vantage Pointe 9/28 Real Estate; Mortgage Bankers and Brokers 200
Investor Group Sea Island Co 9/11 Hotels and Casinos 199
TreeHouse Foods Inc ST Specialty Foods Inc 9/13 Food and Kindred Products 195
Prestige Brands Holdings Inc Blacksmith Brands Holdings Inc 9/20 Holding Companies, Except Banks 190
Behringer Harvard Multifamily Aqua Rental LLC 9/9 Real Estate; Mortgage Bankers and Brokers 189
Calix Inc Occam Networks Inc 9/16 Communications Equipment 187
Boston Properties Inc Bay Colony Corporate Center 9/27 Real Estate; Mortgage Bankers and Brokers 185
Delaware North Cos Inc Jumers Casino & Hotel Inc 9/9 Hotels and Casinos 180
Hines Global REIT Fifty South 50 South Sixth Street 9/27 Real Estate; Mortgage Bankers and Brokers 180
Seaboard Corp Butterball LLC 9/9 Agriculture, Forestry, and Fishing 178
Investor Group Rosemont Copper Project 9/16 Mining 176
Targa Resources Partners LP Venice Energy Services Co LLC 9/14 Oil and Gas; Petroleum Refning 176
Undisclosed Acquiror Dividend-Goodyear Portfolio 9/9 Real Estate; Mortgage Bankers and Brokers 173
Investor Group Las Olas Ppty,Fort Lauderdale 9/16 Real Estate; Mortgage Bankers and Brokers 170
Gerdau Ameristeel US Inc TAMCO Steel Inc 9/15 Metal and Metal Products 165
Maple Acquisition Corp Microtune Inc 9/8 Electronic and Electrical Equipment 158
Virtual Radiologic Corp NightHawk Radiology Hldg Inc 9/27 Health Services 157
LaSalle Hotel Properties Westin Philadelphia 9/1 Hotels and Casinos 145
Shamrock Capital Growth Fund Screenvision Cinema Network 9/27 Advertising Services 140
Churchill Downs Inc Harlows Casino Resort & Hotel 9/13 Hotels and Casinos 138
BioMed Realty Trust Inc San Diego Ppty Portofio(5),CA 9/8 Real Estate; Mortgage Bankers and Brokers 133
Arrow Electronics Inc Nu Horizons Electronics Corp 9/20 Wholesale Trade-Durable Goods 131
Taleo Corp Learn.com Inc 9/1 Business Services 125
Deka Immobilien Invest GmbH SL Green-19 West 44th St Ppty 9/7 Real Estate; Mortgage Bankers and Brokers 123
Sprott Inc Rule Investments Inc 9/22 Investment & Commodity Firms,Dealers,Exchanges122
Citigroup Inc Student Loan-Loan Assets 9/17 Credit Institutions 122
Corporate Offce Ppty Trust Maritime Plaza,Washington,DC 9/28 Real Estate; Mortgage Bankers and Brokers 119
Green Plains Renewable Energy Global Ethanol LLC 9/28 Chemicals and Allied Products 119
RioCan RE Invest Trust GroceryAnchored & RetailStores 9/16 Retail Trade-Food Stores 119
Corporate Offce Ppty Trust Power Loft @ Innovation 9/14 Real Estate; Mortgage Bankers and Brokers 115
Denbury Resources Inc LaBarge Field in Wyoming 9/15 Oil and Gas; Petroleum Refning 115
TNS Inc Cequint Inc 9/8 Communications Equipment 113
Target Price
Acquirer Target Date Industry ($mil)
* Data provided by Thomson Reuters
048_MAJNov10 2 10/8/2010 8:40:28 PM

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NOVEMBER 2010 THE OFFICIAL PUBLICATION OF

events will take place

BREAK-UP FEES continued on page 46

14 MERGERS & ACQUISITIONS November 2010

BACKLOG continued on page 46

NEW EQUITY continued on page 46

The deal fow

has yet to translate into a wealth of opportunities. Much of the

24 MERGERS & ACQUISITIONS November 2010

LPs are much

Q&A: AIign in the Sand

t's not that

Tracking the EagIe

Guideposts for a Carveout

November 2010 MERGERS & ACQUISITIONS 35

36 MERGERS & ACQUISITIONS November 2010

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