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    PE Week Wire -- Monday, September 26

Monday Mouth-Off

The sky is gray, the Red Sox are tied for first and Bill First seems a bit unclear on the definition of a blind trust. In other words, it’s time for Monday Mouth-Off.

*** First up were responses to last Monday’s column on emerging VC fund managers. The majority of you felt that Formative Ventures and Brooks/Levine (former Mayfield guys) qualify as emerging managers, but that Panorama (JPMorgan Partners VC group) and Sequoia Capital China do not. Dave writes: “The distinction should come down to whether or not the manager has an existing institutional structure and culture to fall back on. The Formative team obviously started from scratch. The ex-Mayfield GPs have a common experience, but cannot rely on the Mayfield name to get them through the fund-raising process. Panorama has said that it doesn’t expect any real changes from when it was part of JPMP, and even will have J.P. Morgan [Chase] as an LP. Sequoia Capital China will have some new partners, but it’s still just a satellite office/fund of an existing firm.”

K added that I was too harsh in my criticism of LPs whose “emerging manager programs” seemed to ignore firms like Formative. He wrote that spinouts, first institutional funds and first-time funds with experienced teams all make sense for an emerging manager program, but that a first-time fund with first-time investors deserves to be a tough sell:

“I’ve seen too many entrepreneurs who have founded a company or two, or even worse, a group of I-bankers, hang out a shingle and say “We’re a private equity firm.” Guess what? it ain’t so. Multi-tasking across several investments simultaneously, dealing politically with VC syndicates and serving on multiple boards, really knowing what to do when a company is in trouble, knowing how to run a fund by properly creating reserves for follow on rounds – all of this is apprenticeship work you learn by working at a private equity firm. As an LP, I’m taking enough risk on backing a new team with a new team dynamic without also providing a kindergarten for investment professionals. Almost no investor group I know of invests in this type of program. And in my opinion, a friends and family fund of $5m answers some questions (can the two GPs work together without killing each other?) but it doesn’t answer the question of whether or not they can effectively source and invest larger amounts of money.

The dynamic of investing $100,000 into a deal are very different than $2.5 million -- Do syndicates want you at a larger amount? Can you handle board seats? Also, critical mass – if you only have two GPs, what happens when one is hit by a bus? An entrepreneur as part of a team is fine. An entire team without private equity experience? No way.”

*** Also a bunch of emails about my disgust with the greed of Gillette CEO James Kilts, who soon will receive over $165 million while many Gillette employees are laid off. Ben writes: “I am no supporter of overpaying management, but Kilts did take a $30 stock and turn it into a $55 stock, creating $25 billion in value for his shareholders, so giving him less than 1% of that doesn’t seem too unreasonable (particularly when compared to the typical fees private equity shops charge their shareholders). Efficiency is what drives this country, gives us cheap goods, allows us to pay for an army that can stomp around the world, etc, so railing against Kilts for driving efficiency through this transaction seems a little odd. I am sure some other CEO could have done what Kilts did for less money, but that is the board’s fault not Kilts’.”

*** Finally, a lot of readers correctly answered Friday’s second quiz question, about the Boston-area VC firm raising an $800 million fund with a strategy of "First institutional money in, no matter the round." Congrats to everyone who wrote: Highland Capital Partners.

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    Top Three, a Monterey, Calif.-based online marketplace operator, has raised $25 million in its first round of venture capital funding. Oak Investment Partners led the deal.

The New York Mercantile Exchange has told former chairman Michael Marks that it will not consider his $140 million bid for a 10% stake. The offer was being backed by Hellman & Friedman, and came after NYMEX recently signed a non-binding letter of intent to sell the stake for $135 million to General Atlantic. In related news, Battery Ventures reportedly has offered to pay $75 million for 5% of NYMEX. Battery previously had teamed with Blackstone Group to bid on the 10% position which now seems to be headed to General Atlantic.

Corgentech Inc. (Nasdaq: CGTK) has agreed to merge with AlgoRx Pharmaceuticals Inc., in order to create a drug company focused on developing and commercializing products for pain management and inflammation. The stock-for-stock deal will result in AlgoRx shareholders owning approximately 62% of the combined company. AlgoRx has been in registration for an IPO, and has raised approximately $97 million in total VC funding from firms like InterWest Partners, JPMorgan Partners, Sofinnova Ventures, Advent International, Index Ventures and Pacific Rim Ventures.

    VC Deals

BioLineRx Ltd., an Israel-based drug development company, has raised $9 million in second-round funding. Return backers included Giza Venture Capital, Pitango Venture Capital and Teva Pharmaceuticals Industries Ltd. BioLineRx has now raised approximately $23 million in total VC funding, plus has received a $21 million Israeli National Biotech Initiative grant. Its lead drug candidate focuses on the treatment of schizophrenia.

mPortal Inc. of Vienna, Va. has raised $4 million from Friedli Corporate Finance. The company enables mobile content and applications for mobile network operators (MNOs), mobile virtual network operators (MVNOs), content providers and enterprises.

VidSys Inc., an Alexandria, Va.-based developer of mission-critical video management and distribution solutions, has spun out from parent company Dynamic Technology Services Inc. The move was supported by $3 million in Series A funding from IDG Ventures Boston, while Mike Mancuso, former president and COO of Aether Systems Inc., has joined VidSys as its founding CEO.

Roundbox Inc., a Florham Park, N.J.-based provider of wireless software for both mobile operators and equipment manufacturers, has raised $8 million in Series A funding. Participants included Core Capital Partners and RRE Ventures.

Sensicast Systems Inc., a Needham, Mass.-based provider of wireless sensor networking products and solutions, has raised $13 million in Series B funding. GEF Clean Technology Fund led the deal, and was joined by return backer Ardesta LLC.

Virtual Iron Software Inc., an Acton, Mass.-based provider of data center virtualization and management software solutions, has raised $8.5 million in Series C funding. Intel Capital led the deal, and was joined by return backers Goldman Sachs, Highland Capital Partners and Matrix Partners. The transaction also includes a collaboration agreement between Virtual Iron and Intel, plus the option for Virtual Iron to raise an additional $2 million with a “strategic go-to-market partner.”

Amtec LLC, a Boca Raton, Fla.-based provider of outsourced solutions to the cable television, telecom and broadband services industries, has raised $5 million in private equity funding from Palm Beach Capital Partners.

Engana Pty Ltd., a Sydney, Australia-based provider of wavelength selective switch modules for use in ROADM applications, has raised Au$8 million in Series B funding. Starfish Ventures led the deal, and was joined by return backers Technology Venture Partners, DB Capital Partners (via its Ericsson-Deutsche Telecom Fund), Intel Capital and unnamed individuals.

Sennari Inc., a Los Angeles-based provider of mobile entertainment and loyalty applications, has raised $5 million in Series B funding. UV Partners led the deal, and was joined by return backers Novak Biddle Venture Partners and Blacksmith Capital.

    Buyout Deals

E.On, a German energy company, has agreed to acquire UK-based Caledonia Oil & Gas Ltd. for approximately 690 million euros (including debt). Private equity firm First Reserve Corp. and the former management team of Highland Energy formed Caledonia in Q1 2003 to acquire and develop natural gas reserves in the North Sea.

The Carlyle Group has agreed to buy AxleTech International from Wynnchurch Capital, Resilience Capital Partners and other minority shareholders. No financial terms were disclosed for the deal, which is expected to close next month. AxleTech is a Troy, Mich-based provider of axles, brakes and other drive-train components for off-highway and specialty vehicles in the commercial and military markets.

General Atlantic reportedly has agreed to acquire a 7.95% stake in New Delhi Television Ltd. from Shyam Cellular Infrastructure Projects Ltd.

    PE-Backed M&A

Intermix Media Inc. (AMEX: MIX) said that its board of directors has rejected a $13.50 per share buyout offer from former Intermix chairman and CEO Brad Greenspan. Instead, it continues to favor a $12 per share offer from News Corp. (NYSE: NWS), that also would include Intermix purchasing the 47% of that it doesn’t already own. VantagePoint Venture Partners holds a 22.4% stake in Intermix, while Redpoint Ventures holds a position in Greenspan’s offer would have included the participation of several unnamed private equity firms.

CyberSource Corp. (Nasdaq: CYBS) has agreed to acquire CardSystems Solutions Inc., an Atlanta-based provider of credit card-based merchant payment services. No financial terms were disclosed for the deal, which is expected to close sometime in the fourth quarter. CardSystems has raised over $80 million in private equity funding since its 1993 inception, from firms like Advent International, Camden Partners, The Edgewater Funds and Equity Dynamics.

Schick Technologies Inc. (OTC BB: SCHK), a Long Island City, N.Y.–based provider of digital radiographic imaging systems for the dental industry, has agreed to merge with German dental equipment manufacturer Sirona Dental Systems Inc. The stock-for-stock transaction is valued at approximately $1.9 billion, with Sirona shareholders to hold a 67% stake in the combined company. Sirona recently completed a management buyout from former owner EQT Partners, with Madison Dearborn Partners and Beecken Petty O'Keefe and Co. participating.

Scalable Software Inc., a Houston, Texas-based provider of It asset management software, has acquired META Security Group Inc., a Charlotte, N.C.–based provider of compliance management systems. No financial terms were disclosed. META Security has raised over $12 million in VC funding from firms like the Wakefield Group and JMI Equity.

    Firm & Fund News

Wolfgang Reichenberger is stepping down from his CFO post with Nestle SA, in order to create a corporate inv*stment program focused on promising businesses in the areas of science and nutrition. The vehicle will be called the Nestle Growth Fund, and is being capitalized with 500 million euros from Nestle. Reichenberger will partner in the fund formation and management with Gunnar Weikert, founder and chairman of Inventages Venture Capital Inv*stments Inc.

The Venture Capital Office Managers Association (VCOMA), a nationwide organization for office managers in the VC and private equity industries, has launched. It was founded by Tracey Miles of Dali, Hook Partners, and is designed to “unify decision makers, increase purchasing power, and share resources, information and ideas.”

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Sept. 26, 2005

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