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    PE Week Wire -- Monday, August 21

Could LBO Firms Buy Microsoft?

I appeared on CNBC’s SquawkBox program this morning, in order to discuss The Financial Timesinane suggestion that Microsoft could be next on the private equity shopping list. As I told the equally-skeptical anchors, Snakes on a Plane will win a best picture Oscar before Microsoft gets acquired by LBO firms. For those of you (understandably) not awake at 6:45am, here is my three-part rationale:

LBO firms simply don’t have enough money
Commit that line to memory, because there are very few contexts in which it isn’t laughable.

S&P reports that the average $1 billion+ buyout includes around 30% equity, while the largest deal of late (HCA) came in at just under 17 percent. But Microsoft has a market cap of around $260 billion. Even if buyers were real aggressive and lowered the equity commitment down to just 10%, they’d still need to come up with around $26 billion. This simply isn’t doable, so long as: (A) The largest funds are around $15 billion and (B) Most firms are loathe to commit more than 20% of fund capital to a single portfolio company. Even if KKR, Blackstone, Apollo, Permira and TPG all committed that full 20%, you’d still be short by around $11 billion. And that doesn’t even take a bid premium into account, nor does it contend with mega-fund promises of fewer club deal going forward.

Bankers won’t bite
The FT acknowledges that this might be a deal without a viable exit strategy, and then says that it doesn't matter. In other words, buyers could pay themselves back and generate some profit via financial engineering alone. If they can sell it back on the public markets, great. If not, they’ll just leave bankers holding the bag. Or maybe the bankers will kick the can down to the credit derivatives market. Either way, it’s not the LBO sponsors’ problem. Nifty theory, but only if the LBO firms never want to do another deal.

Fundraising will suffer
The biggest private equity market shift of the past 20 years is that the larger funds are now reliant on public pensions. The State of Washington, for example, committed $1.5 billion to KKR’s last fund.

So imagine if KKR suddenly helped buy Microsoft and -- as the FT suggests – lays off lots of workers, sells off/shuts down a few divisions and ignores the rest because it's already gotten paid via dividend recaps? No elected official in Washington would ever again be able to justify an investment in KKR, nor any other firm that helped strip jobs from one of the state’s largest private employers. Might be a tough sell in other West Coast states as well (think Oregon and California).

*** Look, I like speculation as much as the next pundit, but let's keep it in the range of reasonability. The $80 billion ceiling holds for now, and all that will come out of the Microsoft pipedream is my television appearance.

    Top Three

Apax Partners and Bain Capital have agreed to join the private equity consortium that is acquiring an 80.1% stake in the Semiconductor division of RoyalPhilips Electronics (NYSE: PHG). The group already had included KKR, Silver Lake Partners and AlpInvest.

Infinite Power Solutions Inc., a Golden, Colo.-based maker of thin-film batteries, has raised around $35 million in Series A-1 funding, according to a regulatory filing. Shareholders include Core Capital Partners, Polaris Venture Partners, SpringWorks LLC, D.E. Shaw, Advanced Energy Technology, Dow Corning and Symmorphix Inc.

Cdb Web Tech of Italy has agreed to sell limited partner stakes in 90 venture capital funds to Pantheon Ventures for around $310 million.

    VC Deals

Artisan Therapeutics Inc., a Framingham, Mass.-based acute care startup, has raised $39 million in Series A funding, according to a regulatory filing. VentureWire reports that investors included NGN Capital, New Leaf Venture Partners and Apeiron Partners.

Thiakis Ltd., a UK-based developer of peptide hormones for the treatment of obesity, has raised £10 million in Series A funding. Novo AS and Advent Venture Partners co-led the deal, and were joined by The Royal Society, Esperante, Consensus Business Group and NPI Ventures. Seed backer Imperial Innovations also participated.

Covega Corp., a Jessup, Md.-based maker of opto-electronic components and subsystems, has raised $10 million in new VC funding. Core Capital Partners, Intersouth Partners and Optical Capital Group/HRLD co-led the round, which also included Siemens Venture Capital and Square One Bank. Covega has raised $30 million in total VC funding since its 2003 inception.

Friendster Inc., a San Francisco-based social networking company, has raised $10 million in new VC funding. DAG Ventures led the deal, and was joined by return backers Kleiner Perkins Caufield & Byers and Benchmark Capital. Friendster raised over $15 million in VC funding in 2002 and 2003, but was recapped earlier this year with around $3 million.

CHiL Semiconductor Corp., a Tewksbury, Mass.-based maker of mixed-signal ICs for the digital power market, has raised $5 million in Series B funding, according to a regulatory filing. Backers include IDG Ventures Boston and Highland Capital Partners.

Voxify Inc., an Alameda, Calif.-based provider of speech recognition technologies for automated customer service, has raised $5 million in Series C-1 funding, according to a regulatory filing. Existing shareholders include Sigma Partners, El Dorado Ventures and Palomar Ventures.

Flexuspine Inc., a Tyler, Texas-based device company focused on replacement of the functional spinal unit, has secured $3.12 million of a $9.1 million Series B round. Backers include Warburg Pincus, The Vertical Fund, Onset Venture Partners and Morningstar Asset Management.

GCT Semiconductor Inc., a San Jose, Calif.-based provider of ICs for the wireless communications industry, has raised $5 million in Series E funding co-led by DoCoMo Capital and JAIC America co-led the deal. GCT has now raised around $78 million in total VC funding since its 1998 inception.

OyoGen Inc., a Rochester, N.Y.-based HIV drug company, is raising up to $12 million in Series A funding, according to VentureWire. It already has secured seed backing from The Trillium Group.

    Buyout Deals

Lone Star Funds has agreed to acquire Lone Star Steakhouse & Saloon Inc. (Nasdaq: STAR) for $27.10 per share (15% premium to Thursday’s closing price). The total deal is valued at over $600 million, and is expected to close in Q4. North Point Advisors and Thomas Weisel Partners are serving as financial advisors to Lone Star Steakhouse & Saloon, while Piper Jaffray & Co. is serving as financial advisor to Lone Star Funds.

American Capital Strategies has completed a "one-stop" buyout of Scientific Protein Laboratories LLC, a Waunakee, Wis.–based manufacturer and supplier of biologic active pharmaceutical ingredients, from Arsenal Capital Partners.

Genstar Capital has acquire OnCure Medical Corp., a Newport Beach, Calif.–based provider of radiology therapy. No financial terms were disclosed. Sellers include Halpern Denny & Co., Crossbow Ventures and MedEquity Capital.

WestLB this week is expected to pick a winner in the auction for its 27% stake in fellow German bank HSH Nordbank. J.C. Flowers & Co. is considered the favorite, with other bidders including Corsair Capital and Cerberus Capital.

Wind Point Partners has agreed to acquire the Specialty Plastics business of Ferro Corp. (NYSE: FOE) for an undisclosed amount.

Foot Locker Inc. (NYSE: FL) has retained Evercore Partners to advise "on a range of matters." That range is expected to include a possible sale, as first disclosed in May when Women’s Wear Daily reported that the retailer was being circled by such private equity firms as KKR, Apollo, Blackstone Group and Thomas H. Lee Partners.

    PE-Backed IPOs

Picis Inc., a Wakefield, Mass.-based provider of healthcare software for high-acuity areas of the hospital, has filed to raise $86.25 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol PICS, with Goldman Sachs and Piper Jaffray serving as co-lead underwriters. Significant shareholders include Brown Brothers Harriman’s 1818 Fund (32.1% pre-IPO stake) and Camden Partners (9.78%).

Global Broadcast News Ltd., an India-based operator of the CNN-IBN television channel, is planning to raise up to $22.6 million via an IPO. It is controlled by Television Eighteen Ltd., but also received some private funding earlier this year from IL&FS Investment Managers.

    PE Exits

Silver Lake Partners is looking to sell electronic institutional brokerage Instinet, according to Financial News Online. Silver Lake acquired the company just last year, as part of a three-way deal with Nasdaq and The Bank of New York.

Unity Wireless Corp. (OTC BB: UTYW) has acquired Celletra Ltd., an Israel-based supplier of coverage enhancement solutions for 2G and 3G wireless networks, for around $10 million in stock. Celletra had raised over $28 million in VC funding from firms like Star Ventures, Gemini, Infinity, Mofet Technology Fund and Clal.

    PE-Backed M&A

RathGibson Inc., a Janesville, Wis.-based maker of stainless-steel and alloy-welded tubing products, has acquired Greenville Tube Co., a Greenville. Pa.–based manufacturer of stainless-steel tubing. No financial terms were disclosed. RathGibson is a portfolio company of Castle Harlan, while Greenville Tube had been backed by Capital for Business, Hickory Venture Group, Diamond State Ventures, Alpha Capital Partners and Mid States Capital. Goldsmith Agio Helms advised Greenville Tube on the deal.

    Firm & Fund News

CVC Capital Partners has asked a majority of its executive assistants to resign over alleged misuse of corporate frequent flier miles, according to The Sunday Telegraph.

Matrix Partners is planning to raise up to $445.5 million for its eighth general VC fund, according to a regulatory filing.

GSR Ventures has closed its inaugural fund with $75 million in capital commitments, according to a regulatory filing. Limited partners include Horsley Bridge, Private Equity Technology Partners (Switzerland) and Dunearn Investments (Singapore). The Menlo Park, Calif.-based firm focuses on tech companies with substantial operations in China, and is affiliated with Mayfield Fund.

Apax Partners is planning to open an office in Mumbai by November, according to The Economic Times of India.

    Human Resources

Harris Williams & Co. has promoted John Beveridge, Michael Bor and John Bresnahan to vice president. It also has promoted Brent Spiller to associate.

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August 21, 2006

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