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    PE Week Wire -- Tuesday, June 27

Today's guest column comes from Charley Lax, managing general partner of GrandBanks Capital.

A year has passed since my PE Week Wire missive that drew comparisons between the 2004 World Series Champion Boston Red Sox and the repercussions on the venture capital market after passage of Sarbanes-Oxley (SOX). And you’ll find that some things haven’t changed. Today, the Red Sox continue to be a dominant force in baseball as they battle for first place in the AL East. And Congress remains unaffected by those speaking out against SOX compliance rules, which are still in place with no current hope for reform in sight. Case in point: the SEC recently announced that it intends to issue more guidance on SOX compliance, basically ignoring the NVCA and the 32 recommendations of the Committee for Small Public Companies which had spent the last year analyzing the challenges involved with Section 404 compliance and pleading for changes to its guidelines. Who now can we call a “bunch of idiots?”

In today’s ramblings, I will again stress the negative effect of SOX, but also illustrate some actions that we -- as investors and companies -- can take while Congress continues to “blow smoke” in our faces about reforming 404.

Yes, there is a band-aid that venture-backed companies can place over SOX to stop the lack of liquidity options for them in the U.S. In 2005, 901 companies received venture funding, while only 397 companies celebrated the fruits of liquidity in the form of 356 M&A transactions and 41 IPOs (according to MoneyTree). With the Nasdaq looking less and less open to venture-backed companies, investors can make congressional leaders sit up by exploring liquidity options outside of our borders, such as the London AIM Exchange, the Toronto Stock Exchange or the Japanese markets. If we threaten to take our money and our companies away from our native soil, then will Washington react? Well, maybe only if we include Halliburton as a strategic investor…

Over the past five years, Nasdaq has experienced limited growth in total market capitalization and an evident decline in the number of listed companies. True, the NASDAQ market is still significantly larger than AIM in terms of market cap, but we have to take into account the effect that 404 compliance rules have had on the IPO market. Today, our venture-backed companies need to possess yearly revenues between $80 and $100 million to even consider the Nasdaq IPO path. So where then can venture-backed companies turn?

I have my own skepticism of the benefits of moving overseas. As a cigar aficionado, I have a tendency to steer away from cities like London and Toronto that have declared themselves “smoke-free.” However, taking a hard look at the numbers has swayed me into exploring AIM as an option for some of the companies in our current GrandBanks portfolio. Compared with the Nasdaq market in 2005, London’s AIM exchange showed a higher volume of new offering activity with 519 IPOs (45 on the Nasdaq), and raising a total of $11.5 billion vs. over $2 billion from companies on the Nasdaq. Looking at cost comparisons, the estimated expense to execute an IPO on AIM is approximately 30% less expensive than filing on the NASDAQ according to Canaccord Adams estimates. To maintain a listing on the AIM public market is 60% less than the Nasdaq according to the same study.

AIM becomes an even more attractive venue to venture-backed companies by offering a streamlined listing process and company-friendly requirements. SOX continued compliance costs, along with the added Nasdaq listing costs, require an EBITDA hit of nearly $2-3 million. Can we really, as a country, continue to focus our efforts on forcing our companies to continue to invest in these non-GNP operating expenses?

According to Ben Howe of America’s Growth Capital, there has not been a single security company IPO in the last three years. SOX has effectively killed the classic U.S. technology IPO. Without a viable U.S. IPO market, our emerging growth technology companies are severely disadvantaged particularly against the growing competition from India and China. Top acquirers like Cisco, Microsoft, EMC and Symantec all smell the decline of the public market even through my heavy cigar smoke, and do not offer the IPO valuation premiums that we usually seek when pursuing M&A. This results in our portfolio companies suffering from a decline in exit valuations. These acquirers need to recognize that we do indeed have public market options and London’s AIM is among those paths that we are pursuing.

There may not be a solution in sight on Capitol Hill, but we can still take action in the fight against SOX. With a former venture capitalist and prospective Presidential candidate as governor of Massachusetts, all we need now do is replace our current SEC head, Christopher Cox, with another Cox. I hereby nominate Greylock’s Howard Cox, a former NVCA Chairman who understands his way around both capital formation and D.C. (he worked earlier in his career for the Secretary of Defense).

So for those of you who want to make changes for our venture-backed companies, "pull out a Montecristo at a dinner party and the political liberal turns into the nicotine facist."
-- Martyn Harris, British journalist, Daily Telegraph 1/20/89

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    Top Three


Univision Communications has been sold. The consortium of Madison Dearborn Partners, Providence Equity Partners, Texas Pacific Group, Thomas H. Lee Partners and Saban Capital Group won the auction for the Spanish language media company, paying $13.7 billion, or $36.25 a share. News of the sale comes just days after marketwatchers were speculating that the company would take itself off the block following a disappointing, $35.75-per-share offer from the Grupo Televisa bidding party, which included backing from Cascade Investment and Bain Capital.

In an IPO scheduled for today, New York clothing retailer J. Crew is aiming to raise up to $319.6 million, not including additional shares the underwriters may sell. The company, majority owned by Texas Pacific Group, hopes to sell 18.8 million shares within a $15 to $17 price range. J.Crew will trade on the New York Stock Exchange under the ticker symbol JCG. Goldman, Sachs & Co. and Bear, Stearns & Co. Inc. are serving as lead underwriters. Post IPO, TPG will retain a 40% stake in the company.

Tengion, a King-of-Prussia, Pa.-based developer of replacement human organs, raised $50 million in Series B financing. The financing was led by Bain Capital and Quaker BioVentures. Brookside Capital also participated, as did previous investors Oak Investment Partners, Johnson & Johnson Development Corporation, HealthCap, and L Capital Partners. The company will use the funding for human clinical trials, which it hopes to begin before the end of the year.

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    VC Deals

ATI, which provides outpatient physical therapy services, raised $12 million in funding from KRG Capital and Willowbrook Holdings, according to a regulatory filing. ATI is based in Romeoville, Ill.

Attune Systems, a Santa Clara, Calif.-based provider of communications equipment, has raised $4 million in Series B funding from Alloy Ventures, Media Technology Ventures, QTV Capital and Rock Creek Partners, according to a regulatory filing.

CEVA sold its GPS technology and product line to GloNav for an approximate 20% equity stake in the VC-backed company. GloNav is backed by Atlantic Bridge Ventures.

GlycoMimetics, a Gaithersburg, Md.-based developer of glycobiology-based medical therapies, closed a $15.4 million Series B round of funding. New Enterprise Associates (NEA) led the round and was joined by existing investors Alliance Technology Ventures, Anthem Capital Management, The Novartis Venture Fund, PTV Sciences and the Maryland Department of Business and Economic Development (Maryland DBED).

Guidester, a New York-based provider of search networks for retailers and manufacturers, raised $3 million in venture funding. Draper Fisher Jurvetson Gotham Ventures led the round. Milestone Venture Partners and Wheatley Partners also participated in the funding. The company plans to use the funding to expand its line of search services and expand its network.

Intel Capital invested in four new Chinese companies. The new Intel portfolio companies are college television service company Campus Media, chip designer Montage Technology, software developer Star Softcomm and online computer game provider Winking Entertainment.

Mu Security, a Sunnyvale, Calif.-based provider of security analysis systems, raised $10 million in Series B funding led by Duff Alderman & Goodrich Ventures (DAG Ventures). Previous investors Accel Partners and Benchmark Capital also participated. The new financing brings the company’s total funding to $14 million.

SDCmaterials, a Tempe, Ariz.-based rapid materials discovery company that provides nanotech powders, said it raised $2.2 million in a second round of financing. BASF Venture Capital America invested $600,000 and Schropp Group invested $650,000. The company plans to use the funding to improve its equipment, hire new staff and increase its product line.

Siemens Venture Capital officially opened its office in Beijing. The company plans to close on two or three deals over the next year.

Solido Design Automation, a Saskatoon, Saskatchewan-based electronic design automation company, said it raised $2.5 million in its first round of funding from BDC Venture Capital, Investment Saskatchewan and individual investors. The company was started by the founders of Analog Design Automation, which was acquired by Synopsys in 2004., a Stockholm-based online doll dressing site for girls, closed on $6 million in Series B funding. Sequoia Capital led the round and was joined by Index Ventures.

Stretch, a Mountain View, Calif.-based developer of software configurable processors, said it raised $10 million in Series A funding. The funding was co-led by Menlo Ventures, Oak Investment Partners and Worldview Technology Partners.

    Buyout Deals

Apax Partners has made an investment in Michigan-based Plexus Systems, which provides manufacturers a suite of applications designed to automate business processes. Terms of the deal were not disclosed.

Centre Partners portfolio company Gray Energy Services has completed a deal to buy Master Wireline, L.P., a provider of cased-hole wireline services in the Barnett Shale region of northern Texas. Centre Partners formed Gray Energy earlier this year to target the natural gas and oil production industry. Terms of the deal were not disclosed.

Detroit-based Huron Capital Partners took a majority stake in Southern Staircase through a recapitalization. Headquartered in Alpharetta, Ga., Southern Staircase manufactures and installs customized staircases and handrail systems used in residential construction. Terms of the deal were not disclosed.

HM Capital Partners, based in Dallas, has partnered with Richard Connor to acquire The McClatchy Co.’s Times Leader, based in Wilkes-Barre, Pa., as well as other publications and Websites related to the newspaper. Connor had previously served as president and publisher of the Times Leader. The sale follows McClatchy’s $4.5 billion acquisition of Knight Ridder. When the company bought its rival it intended to divest 12 Knight Ridder papers as part of the deal. The Times Leader sale represents the last of McClatchy’s planned divestitures.

Lion Capital has agreed to a secondary buyout involving American Safety Razor, a portfolio company of J.W. Childs Associates. The London-based firm will acquire the company for $625 million and is expected to complete the deal by the end of next month.

Saugatuck Capital Co., based in Stamford, Conn., has completed an add-on deal for its Macaroni Grill franchisor platform, Waterloo Restaurant Ventures. The firm acquired four San Francisco-area Macaroni Grill restaurants and the development rights for an additional 11 new locations within the region.

    PE-Backed IPOs

Apollo Management-owned Hexion Speacialty Chemicals announced that it is putting the breaks on its initial public offering of common stock due to adverse market conditions. News of the delay comes after the Columbus, Ohio-based company already amended the terms of its public offering to 19 million shares for between $25 and $28 per share, as opposed to the original 18.5 million shares priced between $26 and $28 each.

    PE Exits

Key Principal Partners has sold its stake in Mid-America Packaging back to the company management, which now controls 100% of the business. KPP had backed the 2003 management buyout of the company from its former parent, Temple-Inland.

    Firm & Fund News

Australia’s Ironbridge Capital is reportedly planning to raise a A$1 billion fund. Earlier this year, Pacific Equity Partners raised the country’s first billion-dollar (Australian dollars) plus fund, with A$1.2 billion in capital commitments.

Hong Kong-based Search Investment Group, through subsidiary Squadron Capital, is reportedly setting up a new fund of funds, Squadron Asia Pacific. The fund is targeting between $200 million and $400 million.

    Human Resources
Apollo Group Inc. has appointed Dan Diethelm and George Zimmer to its board of directors.

Data warehousing and management software maker Kalido has hired William Hewitt as CEO. Before coming to the Burlington, Mass.-based Kalido, Hewitt was president of Asia Pacific, a Novell Inc. company. Kalido is backed by Atlas Ventures, Matrix Partners and Benchmark Capital.

BA Venture Partners promoted Andy Vitus to principal. The Foster City, Calif.-based VC firm will have Vitus working on the hardware team and with portfolio companies Auvitek, Picolight, Entone and Enuclia.

Orchard Supply Hardware has appointed Richard Gibson as CFO and Mark Borison as a vice president in its Real Estate and Construction arm. Orchard is backed by Ares Management LLC.


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June 27, 2006

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