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    PE Week Wire -- Thursday, March 16

Random Ramblings

Strangest deal of the day comes out of the Pacific Northwest, where something called Growth Merger Inc. (OTC BB: GMGI) has acquired Neah Power Systems Inc., a Bothell, Wash.-based developer of micro fuel cell technology. This is basically a reverse merger, whereby Neah becomes a public company and its VC backers – like Castile Ventures, WestAM, Frazier Technology Ventures, Alta Partners and Intel Capital – can begin to cash out.

OK, fairly vanilla so far. But a quick look into Growth Merger’s SEC filings reveals that this isn’t your run-of-the-mill blank check acquisition company. Nor is it a group with any sort of experience in the fuel cell space. Instead, the Las Vegas-based company previously owned and operated an adult website called, before divesting last year in order to “assist early-stage companies.”

So we’re left with the assumption that Neah is simply using Growth Merger as a shell to access the public markets without braving an IPO (too early to get Neah on the phone). But I hope not, as the other possibilities would be far more fun to write about…

*** I did another podcast with founder John Furrier yesterday (it should be online shortly), after which we discussed his company’s $5.5 million Series A deal co-led by Venrock Associates and U.S. Venture Partners. I’ve obviously been a skeptic of podcasting as a business model, and have said as much during my recorded conversations with John. Before continuing, it’s also worth noting that I didn’t actually have an iPod until yesterday.

But I like what Podtech is looking to do. The basic idea is to become a sort of outsourced podcasting producer for corporations and established content providers. Now it is certainly true that podcasting is easy enough that most 12 year-olds can do it on their own, but the average 12 year-old has more technical savvy than the average corporation (I know of what I speak). Add in the obvious ad revenue, existing content and a new news podcasting service (like a podcast-ready NPR), and this could be a sensible VC bet. No guarantees yet, of course, but it’s my favorite such model so far.

*** Finally, we’ll have a feedback column tomorrow with the massive amount of email I’ve received on both the SBIC and Illinois/Sudan issues. In the meantime, Bon French of Adams Street Partners wrote in to expand on the comments he made to Crain’s Chicago:

“We at Adams Street and all of our underlying GP's are very supportive of the intent of the Illinois Sudan law. The issue not described fully by Crain's is that the Illinois law goes farther than the US prohibition which has been in effect since 1997, I believe. Illinois requires 1) A certificate under oath, which is a tougher standard, 2) The law isn't clear on how often this would have to be revisited, but presumably on a regular basis, 3) The administrative complexities then would require every underlying portfolio company to itself certify to the GP (so the GP can certify), which in turn would require each company to check with suppliers, distributors, and so on. 4) The kicker is that if despite good faith efforts to police and monitor this, which people are already required to do under US law, someone finds a violation, then that violation causes the LP contract with the Illinois LP to be void--meaning the future capital calls could be defaulted on without the normal penalties in the LP document and the LP could ask to be removed from the fund without living with the withdrawal procedures in the document.

As the GP's realize the severity of being ‘wrong’ in the future even though they are in compliance today, they say ‘forget it--this is too difficult to administer. And the Illinois law would trump our partnership agreement, which we are not comfortable having out there as a risk as to how we operate our partnership.’

Furthermore, the Illinois law is retroactive, so it applies to all existing LP agreements, which is creating a lot of concern. Being compliant with the Illinois law means signing the certificate under oath. Not signing the certificate means one is noncompliant even if you are not doing business in Sudan.

Long story short if the Illinois legislature was will willing to have best efforts language, then everyone would sign, but from everything I can see, the Illinois legislature is not going to change anything. Further complicating the matter is that there is no outside third party source to verify if private companies are in compliance--unlike the public equity or fixed income managers who can subscribe to such services. So, the entire compliance burden falls to the private equity managers, which is a lot more difficult than it might at first appear.

Since this is new, everyone is grappling with the implications and in an oversubscribed fundraising environment, the uncertainties are causing the GP's to decline to take Illinois money.”

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    Top Three

Helicos BioSciences Corp., a Cambridge, Mass.-based DNA sequencing company, has raised $40 million in second-round funding. Return backers include Flagship Ventures, Atlas Venture, Highland Capital Partners, MPM Capital and Versant Ventures. The company raised a $27 million Series A deal in February 2004 at a post-money valuation of approximately $37 million.

Behrman Capital has agreed to sell Athena Diagnostics Inc. to Fisher Scientific International Inc. (NYSE: FSH) for approximately $283 million. Athena was acquired by Behrman in 2002, and is a Worcester, Mass.-based developer of molecular diagnostic and immunodiagnostic tests and services.

Chuan Thor has joined Highland Capital Partners as a venture executive focused on helping Highland portfolio companies expand into Asia. He previously was a partner with JAFCO America Ventures, and is based in Highland’s Lexington, Mass. headquarters.


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    VC Deals

Max-Viz Inc., a Portland, Ore.–based provider of enhanced vision systems for aircraft, has raised $6 million in third-round funding. OVP Venture Partners led the deal, and was joined by return backers Alexander Hutton Venture Partners and Buerk Dale Victor.

NBX Inc., a Saratoga, Calif.-based online sports entertainment company, has raised $3 million in Series A funding led by MK Capital.

Infopia Inc., a Salt Lake City–based provider of on-demand multi-channel ecommerce, has raised $8 million in second-round funding. Hummer Winblad Venture Partners and Trident Capital co-led the deal, and were joined by return backers Transpacific Capital Partners and BC Select Fund.

Six Apart Ltd., a San Francisco–based provider of blogging software and services, has raised $12 million in Series C funding. Focus Ventures led the deal, and was joined by Intel Capital and return backer August Capital.

Federated Media Publishing, a Sausalito, Calif.-based company that connects independent bloggers to advertisers, has raised an undisclosed amount of second-round funding. JPMorgan Partners led the deal, and was joined by return backers Omidyar Network, The New York Times Co., Mitch Kapor, Andrew Anker, Mike Homer and Tim O’Reilly.

Starvine Inc., a Santa Clara, Calif.-based software startup, has raised $700,000 in Series A funding from Alloy Ventures, according to a regulatory filing.

Forrest Drilling Company LLC, an Oklahoma-based startup contract land drilling company sponsored by Carl E. Gungoll Exploration, has raised $30 million in private equity funding from Energy Spectrum Capital.

    Buyout Deals

Cerberus Capital Management and Providence Equity Partners reportedly will make an unsolicited $15 billion bid for the Japanese subsidiary of Vodafone. Vodafone already was said to have been discussing a sale of the unit to Softbank.

Greenwich Energy Investments has acquired MassPower, a 240-megawatt combined-cycle cogeneration facility in Springfield, Massachusetts. No financial terms were disclosed.

The Carlyle Group reportedly is in exclusive negotiations to buy the cable services unit of Taiwan-based Eastern Multimedia Group. If Carlyle is unable to get a deal done, a pairing of Newbridge Capital and Liberty Media is interested.

A2e Venture Catalysts has sponsored a management buyout of Quadrate Ltd., a UK-based data management software company that lets clients migrate data to and from SAP. The Capital Fund also participated.

    PE-Related M&A

SIGA Technologies (Nasdaq: SIGA) has agreed to a reverse merger with Annapolis, Md.-based PharmAthene Inc., thus creating a portfolio of procurement-state biodefense products targeting anthrax, smallpox and chemical nerve agents. The combined company will be called PharmAthene, will remain listed on the Nasdaq and will be 68%-owned by current PharmAthene shareholders. PharmAthene has raised $76.8 million over three rounds of funding from firms like Bear Stearns Health Innoventures, MPM Capital, MDS Capital and the Ontario Teachers’ Pension Plan.

Model N Inc., a South San Francisco–based provider of revenue management solutions for the life sciences market, has acquired Azerity, a Milpitas, Calif.–based provider of price management software. No financial terms were disclosed. Model N has raised around 442 million in VC funding from firms like Accel Partners, Accel-KKR and Meritech Capital Partners. Azerity raised a $15 million VC round in 2000 from 3i Group, Beachhead Capital and CE Unterberg Towbin.

    Firm & Fund News

Brockway Moran & Partners is looking to raise up to $600 million for its third fund, according to a regulatory filing. Credit Suisse is serving as placement agent. The Boca Raton, Fla.-based firm’s previous fund was capped at $410 million in 2002.

HIG Capital is planning to raise $500 million for its first hedge fund, according to LBO Wire. It has hired former Ziff Brothers researcher Alan Axelrod to head up the effort.

    Human Resources

HarbourVest Partners has made four promotions: Kevin Delbridge to senior managing director, Michael Taylor to managing director, Julia Ocko to principal and Scott Voss to principal.

Darren Wallis has joined Osage Ventures as a managing partner. He previously was with the M&A group of SAP AG.

Edwin Harper has been named to the board of Allied Capital (NYSE: ALD). He currently served as senior VP for public affairs and governmental relations with Assurant Inc.

Lisa Hook has been named president and CEO of SunRocket Inc., a Vienna, Va.–based Internet phone service provider. She previously served as president of AOL Broadband and, before that, as a partner with Brera Capital Partners.

Ross Jones, managing director of Berkshire Partners, has resigned from the board of Carter’s Inc. (NYSE: CRI), effective after the company’s May 11 stockholders meeting. Berkshire acquired Carter’s in 2001, and has since reduced its ownership position to approximately 13 percent.

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March 16, 2006

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