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    PE Week Wire -- Monday, May 1

What Arvind Worry?

Intel Corp. last week launched a 90-day strategic review designed to cut costs, following disappointing Q1 results and lowered Q2 expectations. Every single department – from flash memory to janitorial services – will be put beneath the magnifying glass, with pundits already speculating that Intel Capital could be among the most likely to get burned. If so, it could not come at a worse time.

Intel Capital has been around for more than 15 years, but has been transformed since Arvind Sodhani took over as president last March. The group’s historical “drop and run” strategy was to make very small investments in companies that would help foster a better macro-ecosystem for Intel products. For example, it backed a number of WiFi hotspot infrastructure companies in order to help prepare for the Centrino launch (just as it is now doing with WiMax). But Intel Capital almost never led deals or participated in follow-on rounds. It obviously needed companies to succeed (or at least say alive), but its ROI was judged less in IRR and more in Intel Corp.’s quarterly numbers.

Such passivity did not sit well with Sodhani, who wanted to take fuller advantage of Intel’s existing resources. He began an internal review that resulted in several key changes. First, Intel Capital began not only leading deals, but also committing at least 50% of the rounds it leads. Moreover, it is consistently putting pro rata into follow-on rounds, if not more. Second, it is doing a more comprehensive job introducing portfolio companies to eventual customers. For example, it has begun so-called Intel Technology Days, in which Intel Capital pros spend an entire day at a portfolio company’s headquarters, introducing it to various outside executives. This program also is soon expected to have a consumer component.

Third, Intel Capital has aggressively courted the global market. It’s got $250 million dedicated to India, $200 million to China, $50 million to the Middle East and $50 million to Brazil. Last year, for example, the group invested $265 million, with 60% going to non-U.S. companies. Finally, Intel Capital is now stapling investor compensation to IRR, rather than just a fixed salary with stock options.

All of this is an effort to make Intel Capital more hands-on and increase activity. Just last month, for example, it closed several hot deals, committed to a Middle Eastern fund, helped a portfolio company go public in India, merged two portfolio companies into a stronger whole and agreed to sell LANDesk Software and Netcentrex for $416 million and $164 million, respectively.

I have little doubt that Sodhani’s changes will improve Intel Capital from an ROI perspective (it’s a bit too soon for quantitative analysis). It also should help Intel Capital better build out its fabled macro-ecosystem. But it also costs more in the short-run.

Sodhani told me last Friday that he couldn’t comment on the strategic review, in large part because he didn’t yet know much more than anyone else. The only newsworthy tidbit was his insistence Intel Capital would neither be shutdown or spun out.

Again, I strongly support what Sodhani is doing, but it seems far too early to be so confident. Most of Intel Capital's recent expansion could be viewed as some very new expenditures on the budgetary totem pole. And we all know where the chopping usually begins...


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    Top Three

Cardiokine Inc., a Philadelphia-based drug company focused on heart failure and related cardiovascular and metabolic indications, has raised $50 million in Series B funding. Advent Venture Partners and Fidelity Biosciences co-led the deal, and were joined by Teachers Private Capital and return backers Perseus-Soros Biopharmaceutical Fund, HealthCare Ventures, Care Capital, CIBC Capital Partners and Burrill & Company.

Chrysalis Capital Partners has agreed to acquire the assets Republic Storage Systems Co., a bankrupt manufacturer of lockers, industrial and commercial shelving, storage racks, mezzanine systems and shop equipment. The deal was approved last Friday by a U.S. Bankruptcy Court judge, and is expected to close shortly. Republic voluntarily filed for Chapter 11 protection on March 14, citing the negative impacts of a major flood resulting in a factory shutdown in 2003, the doubling of steel prices in 2004 and unsustainable legacy costs for retiree health care and pension benefits. At the time, it announced its intention to sell to Monomoy Capital Partners.

Vonage Inc., a Holmdel, N.J.-based broadband phone company, has set its proposed IPO terms to 31.25 million common shares being offered at between $16 and $18 per share. At its high end, the deal could value Vonage at $2.6 billion. The company plans to trade on the Nasdaq under ticker symbol VG, with Deutsche Bank Securities, Citigroup and UBS serving as co-lead underwriters. It has raised around $396 million in total VC funding, including a $200 million Series E deal in 2005 at a post-money valuation of $915 million. Shareholders include Bain Capital, Meritech Capital Partners, New Enterprise Associates, 3i Group and Institutional Venture Partners.

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    VC Deals

Meru Networks Inc., a Sunnyvale, Calif.-based WiFi company, has raised $25 million in fourth-round funding. Lehman Brothers Venture Partners led the deal, and was joined by return backers Clearstone Venture Partners, BlueStream Ventures, JumpStartUp Ventures, Evercore Ventures and NeoCarta Ventures. Meru has raised $68 million in total VC funding since its 2002 inception.

Luminus Devices Inc., a Woburn, Mass.-based developer of solid-state light-emitting devices, has raised $38 million in Series D funding. Return backers include Battery Ventures, Argonaut Private Equity, Stata Venture Partners, Draper Fisher Jurvetson, DFJ-New England and Eastward Capital.

Innovalight Inc., a Santa Clara, Calif.-based developer of nanotech-based printed solar cells, has raised $7.5 million in Series B funding. Harris & Harris Group led the deal, and was joined by return backers Apax Partners, ARCH Venture Partners, Sevin Rosen Funds and Triton Ventures.

FireEye Inc., a Menlo Park, Calif.-based provider of network access control solutions, has raised $6.45 million in Series A funding co-led by Norwest Venture Partners and Sequoia Capital. The company was founded by Ashar Aziz, former CTO of Sun Microsystems’ N1 products.

Lightspeed Audio Labs Inc., a Scotch Plains, N.J.-based developer of an online media collaboration platform for amateur and professional musicians, has raised $1.25 million in seed funding from SAS Investors. The company plans to raise between $6 million and $12 million in Series A funding over the next 12 months.

GaleForce Solutions Inc., a Vancouver-based provider of CRM solutions for wealth management, capital markets and commercial/real estate banking, has raised an undisclosed amount of second-round funding from Yaletown Venture Partners, BC Advantage Fund and Discovery Capital.

RemitPro Inc., an Omaha, Neb.-based developer of electronic check processing and identification verification solutions, has raised $2.5 million in venture funding from Draper Atlantic.

Pump Audio LLC, a Hudson Valley, N.Y.-based digital agent for independent musicians, has raised an undisclosed amount of Series A funding co-led by Greycroft Partners and High Peaks Venture Partners.

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    Buyout Deals

Kerzner International Ltd. (NYSE: KZL), a Bahamas–based developer and operator of destination resorts, casinos and luxury hotels, has amended the terms of a definitive acquisition agreement from $76 per ordinary share to $81 per ordinary share. In exchange, Kerzner has agreed to terminate its solicitation of superior proposals. The total deal is now valued at approximately $3.8 billion – including the assumption of $599 million in debt. The buying consortium is led by company chairman Sol Kerzner and company CEO Butch Kerzner, and also includes Istithmar PJSC, Whitehall Street Global Real Estate, Colony Capital, Providence Equity Partners and The Related Companies. Leverage commitments have been provided by Deutsche Bank Securities Inc. and Goldman Sachs Credit Partners.

Shah Capital Partners has agreed to acquire the Analog & Mixed Signal business unit of Alliance Semiconductor Corp. (Nasdaq: ALSC) for $9.25 million in cash. The deal is expected to close later this month. In related news, Alliance continues to consider the sale of its remaining memory chip operations.

Primavera Systems Inc., a Bala Cynwyd, Pa.-based developer of project portfolio management software, has completed a recapitalization co-sponsored by Francisco Partners and Insight Venture Partners. No terms were disclosed, although the Philadelphia Inquirer reports that the two firms committed up to $200 million in equity.

American Securities Capital Partners has acquired United Central Industrial Supply, a Bristol, Va.–based distributor to the coal mining industry, from The Riverside Company. No financial terms were disclosed.

    PE-Backed IPOs

Luna Innovations Inc., a Roanoke, Va.-based developer of molecular technology and sensing solutions, has set its proposed IPO terms to four million common shares being offered at between $11 and $13 per share. It plans to trade on the Nasdaq under ticker symbol LUNA, with ThinkEquity Partners serving as lead underwriter. The company has raised around $21.5 million in total VC funding from firms like Novak Biddle Venture Partners, Columbia Capital, Envest Ventures and Dawntreader Ventures.

    PE Exits

Nice Systems (Nasdaq: NICE) has acquired Performix Technologies Ltd., a Burlington, Mass.–based provider of contact center performance management solutions. The deal is valued at $13.2 million in cash, plus the possibility of up to $6.15 million in additional earn-outs. Performix has raised around $27 million in total VC funding from firms like Highland Capital Partners, Atlas Venture and Bank of Scotland Venture Capital.

    PE-Backed M&A

Providence Equity Partners reportedly is considering an unsolicited $2.5 billion commitment to help Sony Corp. buy back the 50% stake Bertelsmann AG holds in Sony BMG.

Muze Inc. of New York has paid $11 million to acquire the assets of Loudeye Inc. (Nasdaq SC: LOUD) a Seattle-based developer of B2B digital media solutions. Muze was bought by Enterprise Partners Venture Capital last year from Metromedia.

    PIPE Deals

Nstein Technologies Inc. (TSX-V: EIN) has raised Cdn$10 million in PIPE funding from J.L. Albright Venture Partners and Solidarity Fund QFL. The Montreal-based company provides software for analyzing vast amounts of unstructured data in virtually all languages.

a21 Inc. (OTC BB: ATWO), a Jacksonville, Fla.–based online digital content marketplace for creative professionals, has raised $15.5 million via a private placement of secured convertible notes. StarVest Partners and QueeQueg Partners co-led the deal, and were joined by Morgan Stanley.

    Firm & Fund News

Chrysalis Capital Partners has closed its first institutional fund with $300 million in capital commitments. The Philadelphia-based firm focuses on distressed and special situation opportunities.

Private Equity Investors of New York has closed its fourth secondaries fund with $170 million in capital commitments. Stanwich Advisors served as placement agent.

Veronis Suhler Stevenson reportedly has closed its VSS Communications Partners IV fund with $1.3 billion in capital commitments.

    Human Resources

John Thornton has been named a managing director with Pacific Community Ventures, which expects to hold a first close on its third fund sometime this summer. He previously was a principal with American Capital Strategies.

Charles Mills has joined Giuliani Capital Advisors as a managing director in the firm’s Atlanta office. He previously was with SunTrust Robinson Humphrey as a managing director and head of the industrial practice group.

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May 1, 2006

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