Monday Mouth-Off

The Framingham sky is cloudy, oil futures are rocketing and everyone’s thoughts and prayers are with those in the path of Hurricane Katrina (particularly with those in the Superdome, which just lost a small piece of its roof, and with those in the collapsed hotels/apartment buildings). In other words, it’s time for a somber -- and long -- Monday Mouth-Off:

*** A few of you wrote in to take issue with the following statement I made regarding Mayfield’s loss of some top-tier LPs: “The quality of your investors matters when it comes to recruiting new talent and even sometimes when doing deals. If you don’t believe me, why is everyone so excited that PodShow got funded? Is it because of the money itself, or because the money came from Kleiner Perkins and Sequoia?"

D writes: “There is a huge difference in the value of dollars coming from a venture investor such as Kleiner and Sequoia and an LP investor (even a ‘high quality’ one).The talent, resources, contacts, network, input, aura, direction etc. that Kleiner or Sequoia provide their funded companies truly have the ability to turbo-charge a startup (even an already promising one like PodShow), and allow it to quickly dominate a sector and suck talent from competitors. I have never heard the same said about any specific LP investor.” Good point D… although the participation of certain brand-name LPs can help prompt other LPs to sign up. Then there also are issues like helping out one’s alma matter, having stable investors (endowments will stick around, corporate pensions may not) and having LPs whose staffs are well-paid in order to provide continuity (unlike, say, public pensions).

*** Bryce thinks I jumped the gun in assessing the ROI of Highland and Oak’s investment in FastClick, which has agreed to be acquired by rival Valueclick: “Highland and Oak are not selling out, they are just accepting stock in the combined FastClick/ValueClick in exchange for their FastClick shares. Isn’t it a little too early to say whether Highland and Oak’s LPs are happy. Highland and Oak may be planning to hold their ValueClick shares for the next couple of years, during which period this could become a great investment. Am I missing something?” No Bryce, you’re right. I should have couched the column as “Where it stands now” instead of as “This is how it ends up.” Ditto for my upcoming look at the pending Eyetech Pharmaceuticals acquisition.

*** Bill writes: “I read with interest the links to John Cook, Brad Feld and SiliconBeat in today’s column. Do you know of similar blogs that are LBO-oriented (in contrast to VC-oriented)?” Nope.

*** Now on to SPACs, or blank check acquisition companies (here’. Many of you complained that TheStreet.com story I linked to on Thursday was overly cynical (you’re probably correct), so here is a more balanced look from today’s Washington Post (free registration req.), with a particular focus on SPAC underwriter Ferris Baker Watts. Here are a handful of the dozens of SPAC comments:

William: “I agree that there may be a ‘herd mentality or bubble’ brewing, but also feel that there may be some merit in such a vehicle itself. TheStreet.com… writer forgot to include the biggest SPAC raised up to that date, that of International Shipping Enterprises, who raised $196M. They quickly identified an acquisition target, signed an LIO in February, and are closing the transaction [last Thursday]. Their shares (ISPH.OB) and units (ISPBU.OB) are up from the offer price, and have turnover. Perhaps [TheStreet.com] needs to be cynical to get the interest of the readers. Also, there willeventually be people thatare corrupt and will abuse the systemor the vehicle, but to write off the wholeprocess maybe like writing offMP3 downloads because Napster lost in court. Look at iTunes today!”

Peter: “I agree that an SPAC on its own merits doesn't get you a lot... it's basically an amorphous investment entity. But it can definitely have some big advantages. First, an SPAC often includes an NOL shell, which doesn't actually have value until you find appropriate cash-flow businesses to buy against it. So if you find a business with big NOLs (esp. life science shells, with big R&D investments that might never have paid off), you get a nice tax arbitrage opportunity. Second, having a public currency is good news when prospecting for M&A deals since you can attract talent with liquid stock, which private companies can't do by definition.Any build/buy plan is only as good as the people involved. In a related point, SPACs get the benefit of avoiding the private company discount in M&A discussions, and find it easier to raise senior debt. Finally, although public filings are a pain, they will force discipline to help weed out pretenders.Ditto for SOX costs.”

Bert: “The interest in SPAC's reminds me of the near past - the last 1990's rollup phenomena, which led to blind purpose IPO's whose only goal was to roll up additional industries.Have we already forgotten about Jonathan Ledecky and the $552 million IPO of Consolidation Capital in 1998, which had only a rough guide of potential sectors to be rolled up? The equity shareholders, and Apollo in a subsequent restructuring, had their heads handed to them as they rightly deserved (as it became Building One, then Group Maintenance America Corp., and finally Encompass Services as it sailedinto Chapter 11).I'm sure there are other examples. SPAC's exist only because they can - there are the creation of a moment driven by a hungry market and underwriters who are willing to profit from feeding it. The reinvention of SPAC's makes one wonder how many folks were around just 7-10 years ago.”

*** Finally, results of Friday’s poll question: “Do you expect New York AG Elliott Spitzer to set his sights to private equity?” 48.4% said no, 42.2% said yes and 9.4% were not sure.

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