This post was written by DailyFinance contributor Sam Gustin.

Memo to would-be Silicon Valley moguls: do not double-cross a pair of highly litigious billionaires.

After weeks of back-and-forth legal jousting, the tech heavyweights fighting over Skype are set to announce a deal in which the founders of the popular Web-calling service would regain a stake in the company they sold to eBay (NASDAQ: EBAY) in 2005 for $2.6 billion, according to Bloomberg. Nice trick.

The pact ends an at-times vicious soap opera replete with accusations of back-stabbing, dishonesty, and outright theft against Mike Volpi, the pair's one-time Golden Boy, who they believe double-crossed them. The legal circus held up eBay's proposed $2 billion sale of Skype to a consortium of private investors led by Silver Lake Partners and Andreessen Horowitz, the investment firm of Marc Andreessen, the billionaire co-founder of Netscape.

The pact ends an at-times vicious soap opera replete with accusations of back-stabbing, dishonesty, and outright theft against Mike Volpi, the pair's one-time Golden Boy, who they believe double-crossed them. The legal circus held up eBay's proposed $2 billion sale of Skype to a consortium of private investors led by Silver Lake Partners and Andreessen Horowitz, the investment firm of Marc Andreessen, the billionaire co-founder of Netscape.

Niklas Zennstrom and Janus Friis, who founded Skype before selling it to eBay three years ago, will assume an ownership stake in the company, alongside the consortium, according to the settlement.

The duo, who had asserted an intellectual property claim on Skype's technology, also will drop suits they filed against Skype, the consortium and a former top executive of theirs, as part of the deal.

For the past several months, the pair has sought to hold up eBay's sale of Skype to the consortium for $2 billion in cash. eBay would keep a 35% equity investment in Skype, and has maintained that it wants the deal, which values the company at $2.75 billion, to close before the end of the year.

When eBay bought the company, it hoped buyers and sellers would use the service to negotiate auctions on the site. But while Skype has become popular, it never integrated into eBay the way then-CEO Meg Whitman had hoped, and in 2007, the company wrote down Skype's value to $1.2 billion.

Zennstrom and Friis had sought an injunction against the sale, as well as statutory damages at an eye-popping rate of "more than $75 million daily." Additionally, in a barrage of lawsuits, they accused Volpi, the former chief executive officer of Internet TV service Joost -- which Zennstrom and Friis also founded -- of breaching his fiduciary duty by stealing confidential information in an effort to seal the eBay deal for the consortium.

The suits accused Volpi of lying, stealing and bad faith by gaffling confidential information for the consortium. Last summer, Volpi became a partner at Index Ventures -- a member of the consortium -- after leaving Joost as the chief executive. He remained as chairman of the startup, but Friis and Zennstrom kicked him to the curb after they found out about his alleged double dealing.

In one e-mail Zennstrom and Friis produced for the court, Volpi plotted the Skype bid with Danny Rimer, a partner at Index. Volpi's e-mail refers to various players involved with Skype, and Volpi's hope to remain chairman of the company.

"Could be cool," Volpi writes, according to the document. "J/N/Dyne will be very unhappy, but ... oh well."

J/N are Janus Friis and Niklas Zennstrom, and Mark Dyne is a Los Angeles banker and former Skype board member.

Yeah, oh well. Although the deal may now go through, Volpi, a 42-year-old former Silicon Valley golden boy once rumored to be a possible successor to Cisco's John Chambers, has suffered serious damage to his reputation.

"Even if we give Volpi the benefit of the doubt and assume he prevails on the legal issues, his actions and behavior are likely to put a considerable dent in his reputation," wrote San Jose Mercury News columnist Chris O'Brien. "Volpi seems to have grotesquely underestimated how upset the Joost founders would be. In case you're wondering, the answer appears to be: VERY ANGRY."

Too bad for him, Zennstrom and Friis may be thinking. After all, they felt burned by Volpi and sought to strike back against him. It's a cautionary tale for would-be Valley machers: don't mess with this pair.

Skype soap opera ends as founders set to regain stake ahead of $2B sale originally appeared on BloggingBuyouts on Fri, 06 Nov 2009 09:50:00 EST . Please see our terms for use of feeds.

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This post was written by DailyFinance contributor Peter Cohan.

Wall Street has a short memory when it comes to pay. That's what came to mind when I saw a report saying that many big leveraged buyouts (LBOs) are in trouble -- four of the 10 biggest companies bought in leveraged buyouts have stopped paying back the money they borrowed. Nevertheless, Wall Street will pay itself record bonuses in 2009.

Unless my memory is failing me, it was only 14 months ago that Wall Street nearly went bankrupt. Without trillions of dollars in taxpayer money, it's highly unlikely that it would be in a position to pay itself $140 billion in bonuses this year.

Today, The New York Times offers new insights on where those record-breaking bonuses will go. The biggest bonus recipients are the ones bringing in the cash this year. So traders, who are now making the big short-term profits, will get the biggest bonuses -- fixed income traders will make on average $930,000 in cash and stock, 34 percent more than last year.

By contrast, those folks in private equity will suffer, getting paid 20% to 25% less this year. But that's not because they closed these lousy LBO deals. It's because their business is still in the doldrums. It goes without saying that nobody will force those LBO-deal-doers to repay the bonuses they earned from making those big lousy LBO deals.

And the nature of those LBO deals is creating big problems for the banks that lent to them. How so? The Times reports that Moody's (NYSE: MCO) concluded that 19.4% of companies bought by the 14 largest private equity firms from January 2008 to September 2009 have defaulted -- a slightly higher default rate than the 18.6% default rate for similarly rated companies.

Moody's highlighted two private equity firms -- Cerberus and Apollo -- as the worse performers. Four of Cerberus's six buyouts are in distress or in default, and about two-thirds of Apollo's companies are in equally dire straits.

But since those private equity firms put so little equity in their deals, their investors won't lose much. Instead, the risk is with the people who lent money to the deals when times appeared to be good. Now those lenders will either get stiffed completely or exchange their old, useless paper for shiny new paper.

Meanwhile Wall Street moves on. The fixed-income traders making the big bucks this year will get their record bonuses. And the money makers of yore, the buyout guys, will have to take a little hit -- while shifting the cost of their bad bad decisions onto someone else. And if 2009's fixed-income trades go bad next year, expect no clawback of this year's big bucks bonuses.

Heads I win, tails you lose.

Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.

Big LBOs are teetering, but Wall Street still planning record bonuses originally appeared on BloggingBuyouts on Thu, 05 Nov 2009 16:40:00 EST . Please see our terms for use of feeds.

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Cerberus, the private equity fund that nearly ruined itself by making bad bets in Detroit, particularly on Chrysler, is considering taking its gun company interests public. According to The Wall Street Journal (subscription required), the firm "is in advanced preparations for an initial public offering of Freedom Group Inc." The company has about $900 million in sales.

The move may be a profitable one for Cerberus. Gun company Smith & Wesson (NASDAQ: SWHC) trades at just above $5, near the high end of its 52-week range. That gives the company a market cap of $300 million on sales of about $345 million. On a ratio-and-proportion basis, that would make Freedom worth close to $800 million.

Cerberus may be heading back to basics. The car industry was a high-profile business for the fund to invest in, putting its name in business sections of papers and on financial TV programs around the world. As those investments went bust, Cerberus was faced with clients who wanted to take their money out of its funds. The private equity firm's reputation as an intelligent investor was badly damaged.

The gun industry appears to be a much more steady money-maker than the auto business. Last quarter Smith & Wesson made an operating profit of $17 million on revenue of $102 million, an impressive margin. The company has $35 million in cash and modest long-term debt of $83 million.

There are probably as many guns in the U.S. are there are cars. Gun sales to law enforcement and military interests are always going to offer a steady flow of sales.

Cerberus will probably be able to do with guns what it could not do with its auto interests -- make money.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Cerberus prepares gun company IPO originally appeared on BloggingBuyouts on Tue, 20 Oct 2009 16:10:00 EST . Please see our terms for use of feeds.

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For the past year, silver linings have been in short supply. Even as financial markets claw their way back up, the wealth lost has been neither forgotten nor completely recovered. In the private equity sector, the good news is that, frankly, the situation could have been worse. Though returns plunged, the asset class still outperformed the public equity markets.

A new analysis from alternative investment research firm Preqin puts the private equity industry's return at -30% for the 12 months ending March 31, 2009, a period that encompasses the bulk of the lows without the benefit of the upswing that followed. For the same year-long period, the S&P 500's return was -38.1%, with the MSCI Europe's at -49.9%, and the MSCI Emerging Markets' return at -47.1%.

Private equity performance through the end of March was "poor for most [private equity] fund types, with portfolio valuations continuing to drop as fund managers remain unable to exit any of their previous investments," according to Etienne Paresys, Preqin's Head of Research. Real estate private equity funds were worst, with an internal rate of return of -40.5%, followed by buyout funds (-33.8%), funds of funds (-20%) and venture capital funds (-17.1%).

Though a sufficient data set for the second quarter is not yet available, Preqin believes the results will track with the public markets. "Returns are stabilizing," Paresys says, "and it is likely that future quarters will show a modest increase in net asset value after a sustained period of decline."

The worst seems to be over for the private equity sector, but a 30% decline leaves a long road to recovery. Preqin cites the long-term performance of the asset class as a sign of health -- it has beaten the S&P 500 by 19.1% over a three-year period and 25.4% over five. But this does little to take the sting out of recent losses. When investors look at the balances in their accounts, they're more likely to zero in on what they have lost, rather than the fact that they did better than others.

Private equity returns down 30% -- and that's the good news originally appeared on BloggingBuyouts on Mon, 19 Oct 2009 10:10:00 EST . Please see our terms for use of feeds.

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The next time you take a bite of a Carvel ice-cream cake, you'd better make sure you earned it. The company that owns it, Roark Capital Group, is an Atlanta-based private equity fund named for the virtuously selfish architect concocted by writer and philosopher -- and master of neither writing nor philosophy -- Ayn Rand, the founder of Objectivism.

A tribute to the author in more than just name, Roark has spent most of the financial crisis on the sidelines. Now it has $750 million to put into the private equity market -- nearly half of the $1.55 billion it has under management.

Roark kicked off 2008 by raising $1 billion -- and then did nothing. Rather than rush out to acquire what it could find at likely inflated prices, managing partner Neal Aronson saw that credit spreads were tight and decided the market had reached unsustainable levels. When that year's colossal meltdown in the credit markets debilitated the private-equity community, Roark watched from the sidelines.

Now, thanks to the easing of private equity markets, Roark is ready to make its largest investment in its eight-year history. In September Roark put $180 million into the market, spending $80 million on pet retailer Pet Valu and $100 million on Waste Pro USA, a Florida waste-management company. That's in contrast to the previous 20 months, when Roark only sent $65 million into the marketplace.

Roark's portfolio consists of 25 companies; most of its investments are majority stakes. Fifteen of its holdings are franchise companies; five are in restaurant chains, including Cinnabon and Schlotzsky's, and the company plans to pick up more. Roark's debt load is less than 2.5 times earnings before interest, taxes, depreciation and amortization -- making its approach look conservative compared with the leveraged thrills pursued through 2006 and 2007, when private-equity fundraising routinely set records. This is probably how the fund was able to attract investors like Goldman Sachs (NYSE: GS).

The thawing of the credit markets and acceleration of private-equity activity that's likely to occur in the second quarter of 2010 will be accompanied by a departure from the past, Aronson believes, as the "financial engineers" won't be as active in the private equity marketplace. Instead, companies are looking for "partners who can actually help them grow their businesses and can do so without putting their businesses in jeopardy," he tells Bloomberg News.

Roark seems to be choosing the right time to strike: It can pursue the deals it wants, without the pressure of having to compensate for a recent lackluster performance. Pitchbook Data, a hedge-fund research company, counts 654 private-equity deals completed in the first nine months this year, off 60 percent from the 1,532 deals a year earlier. Those funds that have put money into play over the past year and a half have suffered; Preqin puts private-equity returns for the 12 months ending March 31 at -30 percent.

In an age of stimulus packages, bailouts, and other forms of loathsome government interaction, Ayn Rand -- and her character Howard Roark -- would be proud to see how Aronson has used the Roark name. His company bucked the trend when private-equity money was pouring into acquisitions, and now Aronson can position his fund for a strong 2010, without the considerable financial baggage of its peers. Who would've thought a bite of ice-cream cake could mean so much?

Private equity fund follows Ayn Rand's teachings and finds opportunity originally appeared on BloggingBuyouts on Sat, 17 Oct 2009 11:40:00 EST . Please see our terms for use of feeds.

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Private-equity firms don't have a good track record for improving the properties they buy. They're better known for buying firms, improving efficiencies (sometimes to the company's detriment), milking them for cash, and then flipping them when they can profit. Recently I wrote the sad but familiar tale of Simmons, an iconic mattress company forced into bankruptcy from the debt load left by frequent private-equity flipping.

Will Blackstone Group (NYSE: BX) do the same to Busch Entertainment? On Wednesday, Anheuser-Busch InBev (NYSE: BUD) finalized a deal to sell the group to Blackstone for $2.7 billion, and the early signs suggest that this deal might go better than others.

The country's second-most popular parks-entertainment group, second only to Walt Disney's (NYSE: DIS) parks, Busch operates SeaWorlds in Florida, California, and Texas; Busch Gardens parks in Florida and Virginia; and Aquatica and Discovery Cove in Orlando.

In the deal, Blackstone will provide $1 billion in equity, and the company currently called Busch Entertainment will take on $1.3 billion in new debt. (Anheuser-Busch InBev had originally priced Busch Entertainment at $3.5 billion to $4 billion, but the price was reduced in the downturn.) The seller is also entitled to $400 million in Blackstone's initial profits from the deal. ABI is using the cash from the deal to pay down part of the $52 billion in debt that InBev incurred from buying Anheuser Busch last year.

"They couldn't have found a better company to take over the parks than Blackstone," Dennis Speigel, president of International Theme Park Services, says. "Blackstone is clearly comfortable with the business." Blackstone's Merlin Entertainments has shown with its ownership of Legoland theme parks and Madame Tussands wax museums, and its 50% share in Universal Orlando, that it's in the theme-park business for the long haul. And Blackstone's Merlin Entertainments has undertaken significant improvements in its other holdings, such as a 36,000-square-foot aquarium that it opened at a Legoland this year, and a Legoland water park it's planning.

Another good sign, Speigel says, was that Busch Entertainment president Jim Atchison, with his years of experience in the field, and his management team would stay on in the deal. Speigel does not expect major changes in the executive management team. "The new leadership will be much more entrepreneurial than Anheuser Busch." Spiegel predicts that more properties will be developed nationally and internationally, and that Busch will become a stronger competitor to Disney.

Another big question in the Orlando area, where I'm based, is whether Universal Orlando will become part of the Busch Entertainment group. That's not in the cards now -- Blackstone and NBC Universal each own 50% -- but Speigel thinks the deal gives the parks an opportunity to work together through Disney-style homogenization. Disney picks customers up at the airports, handles their bags, and provides transportation among its parks -- visitors don't even need to rent cars -- and Busch Entertainment and Merlin could create similar experiences to keep customers at Blackstone-owned parks. So far, the deal is looking like a win-win for both sides.

Lita Epstein has written more than 25 books, including Trading for Dummies and Reading Financial Reports for Dummies.

Will Blackstone help Busch parks or take them for a ride? originally appeared on BloggingBuyouts on Thu, 08 Oct 2009 16:10:00 EST . Please see our terms for use of feeds.

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A big cover story in Monday's New York Times looks at how Simmons Bedding Company, a 133-year-old firm, was driven into bankruptcy by private equity firms. The story is alarming in a number of ways, not least for implication that private equity can be a powerfully destructive force in the "real," productive economy.

Could these same firms use similar techniques to push troubled banks over the edge? Now that the FDIC has voted to allow private equity firms to buy troubled banks, we could be looking at another tsunami of bank failures several years in the future.

Let's first take a look at how private equity firms drove Simmons to bankruptcy while making $750 million in profits over the years. The current owner, Thomas H. Lee Partners netted about $77 million in profits collected as special dividends and fees for buying and running the company. Wall Street investment banks also made millions arranging for numerous takeovers of Simmons since its first sale in 1991 when the company had just $164 million in debt.

In ways that are reminiscent of the housing bubble, private investors firms kept selling Simmons for more and more money with each deal since 1991, taking what they could in profits and then finding another buyer to pay more for the company. As with housing speculators who got low-down or zero-down loans, the private equity firms put down little up front to pay for the company and loaded up the company with more and more debt. Today Simmons owes $1.3 billion thanks to the private equity deals.

Has the FDIC put in enough protection to avoid making the same mistakes with banks? The FDIC is desperate to find buyers for what could be another 150 failed banks or more. The insurance fund takes less of a loss if the FDIC finds a buyer rather than liquidating the bank's assets. So it now wants to turn to private equity firms and foreign banks to increase its number of possible buyers.

In order to entice the private equity firms, FDIC approved new rules in August to reduce the amount of cash private equity firms must maintain in banks they acquire. As we've seen in the Simmons example, private equity funds buy distressed companies, slash costs, take whatever cash they can out of the company, and then resell the company a few years later. Do we really want people with that mind-set buying up troubled banks?

Under the new rules, private equity firms must maintain the bank's capital reserves equal to 10% (prior to this change the private equity firms were required to maintain 15% reserves). Banks that buy banks are only required to maintain a 5% minimum requirement. Also, to protect against the type of flipping we've seen in company purchases by private equity firms, private investors must maintain a bank's minimum capital levels for three years. Will these rules truly protect these troubled banks from being used by the private equity firms as money makers until there is no more money to make -- placing banks back on the failure list just a few years later?

Lita Epstein has written more than 15 books, including Trading for Dummies and The Complete Idiot's Guide to Value Investing.

Private equity firms ravaged Simmons; could they do the same to banks? originally appeared on BloggingBuyouts on Mon, 05 Oct 2009 15:40:00 EST . Please see our terms for use of feeds.

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Shamu, the first female orca ever captured, has been dead for 38 years. Isn't it time the world's most famous performing killer whale got her own wax figure?

With private-equity firm Blackstone Group (NYSE: BX), which owns Madame Tussauds wax museums, reportedly in talks to buy SeaWorld and Busch Gardens parks from brewer Anheuser-Busch InBev (NYSE: BUD) for up to $3 billion, a Shamu immortalized in wax may no longer be out of the question.

If this private-equity deal is completed, it would be the biggest in 2009 and one of the largest since the economic crisis began in 2008, The Wall Street Journal reports.

The takeover could be announced as early as this week, but talks are continuing, and the deal could sink, The New York Times and The Journal say, both citing people familiar with the situation. Calls to both companies seeking comment on Saturday were not immediately returned.

The deal would add to Blackstone's theme park portfolio, which also includes Legoland through Blackstone's stake in Merlin Entertainment Group. Blackstone also owns 50 percent of Universal Orlando theme parks, The Journal says. The other owner is NBC Universal, which is reportedly in acquisition talks with cable giant Comcast (NASDAQ: CMSCA).

When Belgium's InBev and U.S.-based Anheuser-Busch completed their $52 billion merger last year, the companies said they would seek to shed some $7 billion in assets, including the maker of Budweiser's entertainment offerings. The merged companies, which together represent the world's biggest beer maker by sales, already sold a South Korean brewery to the buyout firm KKR for $1.8 billion, The Times reports.

If the theme parks deal goes through, Blackstone would gain 10 amusement parks across the U.S., including SeaWorld parks, which feature the Shamu show named after the long-deceased whale, according to The Journal. The newspaper also said longtime Anheuser-Busch CEO August Busch III had expanded the company's theme parks through acquisitions because he believed having the parks would provide the brewer with insight into consumer behavior.

News of the potential transaction is already making a splash, apparently. The Journal reports that the animal-rights group PETA (People for the Ethical Treatment of Animals), sent a letter to Blackstone President Hamilton Jones "urging him to transfer all the animals at SeaWorld to coastal sanctuaries." But the paper said Blackstone declined to comment on the letter.

As of June 30, 2009, Blackstone's corporate private-equity operation had $25.2 billion of total fee-earning assets under management, according to the company's website.

Blackstone may buy Anheuser-Busch InBev's parks originally appeared on BloggingBuyouts on Sun, 04 Oct 2009 11:40:00 EST . Please see our terms for use of feeds.

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For the private equity industry, 2009 is looking a lot like 2003. After yet another tough quarter, the amount of new funds raised plummeted, reaching levels not seen in six years, according to documents provided by London-based private equity research firm Preqin.

Fewer funds are closing, and many of those that are closing are doing so short of their initial targets. There are indicators, however, that the situation could turn around by the end of 2009 or early in 2010.

Private equity funds raised only $38 billion in the third quarter of 2009. This is the lowest worldwide total since the fourth quarter of 2003. From the second quarter of 2008's level of $84 billion, this is a decline of 45%, and it is a mere 18% of the record $208 billion that global private equity funds raised in the second quarter of 2007.

"Historical data shows that the summer months of Q3 often represent a relatively slow quarter for fundraising in any given year," says Tim Friedman, Preqin's head of communications. "For the rate of fundraising to drop by nearly 70% over the course of a year is a dramatic fall," he continues, "and demonstrates just how challenging it has become to raise new funds in the current climate."

By the end of the third quarter of this year, 1,574 funds were on the road, down 1,622 quarter-over-quarter. In total, they have a fundraising target of $754 billion, down from $807 billion the quarter before. Part of the reason for this development is that there are fewer funds trying to raise capital. There aren't as many funds launching, and more are being abandoned. In fact, 90 funds have given up raising funds this year, a sharp increase from 30 in 2008 and 14 in 2007. Friedman observes, "Many of the funds that are closing are doing so short of target, and we have seen a number of fund managers putting their fundraising efforts on hold until 2010, or abandoning them altogether for the foreseeable future."

Given these tougher market conditions, it is taking private equity funds longer to close than in the past. In 2004, it took an average of 9.5 months for a fund to close, growing to 10.6 months in 2005, 11.1 in 2006 and 12 in 2007. The gradual increase is likely attributable to the increase in funds entering the market and higher fundraising objectives. In 2008 and 2009, the average time needed to achieve a close grew to 15 months and 18.3 months, respectively. The increases this year and last are more likely the result of constrained financial market conditions. Only 41% of institutional private equity investors made fresh commitments to private equity funds in the first six months of 2009, and they are generally investing at a much slower rate -- and in fewer funds -- than in the past.

Friedman explains, "Clearly the problem is not on the supply side -- although we have seen the number of offerings on the road drop significantly over the course of 2009, supply is still outstripping demand, with the amount of capital available for new investments significantly down on recent years as institutions remain reluctant to commit to new vehicles."

Rather, the issue is whether the market is in the midst of a shift away from the private equity sector. Though grim for the first three quarters of this year, Friedman does note that there is hope for the last quarter and the beginning of 2010.

A survey by Preqin suggests that investors will be coming back to the private equity asset class soon, with 54% planning to make new commitments in the second half of 2009 and another quarter doing so next year. Over the coming three to five years, 30% of investors plan to increase their allocations to private equity, with another 63% maintaining current levels. Only 6% plan to draw down their exposure.

"A whole swathe of significant private equity LPs are readying themselves to re-enter the market in the final quarter of this year and into 2010," Friedman observes. "Nonetheless, private equity fundraising is set to remain challenging, and we expect firms without a strong track record to continue to struggle in gaining commitments from a more wary investor community."

Global private equity market is way down, but it may have hit bottom originally appeared on BloggingBuyouts on Fri, 02 Oct 2009 10:40:00 EST . Please see our terms for use of feeds.

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California start-up Fisker Automotive has received a $529 million loan from the U.S. to try to build a hybrid sports car in Finland.

$529 million of your money. To build a sports car. In Finland.

News of the Fisker loan comes amid questions about the controversial $465 million taxpayer loan to Tesla at a time when the Silicon Valley-based electric car start-up has already raised over $200 million in private venture capital from prestigious VC's like Draper Fisher Jurvetson, cash-rich companies like Google (NASDAQ: GOOG), and the likes of JPMorgan Chase (NYSE: JPM).

"This is not for average Americans," Leslie Paige, a spokeswoman for Citizens Against Government Waste, told The Wall Street Journal (subscription required) last week. "This is for people to put something in their driveway that is a conversation piece. It's status-symbol thing."

Of course, there's no evidence of corruption or self-dealing in this matter. By all accounts, the money was doled out fairly. And in Fisker's defense, it says that most of the money will be used to finance the production of a $40,000 sedan that hasn't been designed yet.

But still -- huh? Why did we just give a start-up $529 million to build something that they haven't designed yet? Can I have $529 million for the AIDS cure I haven't discovered yet?

It's all very confusing. Still, Fisker did announce last week that it expects to report a profit in 2011, when it estimates it will sell 15,000 units of its Karma car -- a luxury sedan that will cost $87,900.

Of course, to butcher a line from the Roman poet Catullus, the forward-looking predictions of profitability from CEOs of starts-ups should be written in the wind and running water.

$529 million of our money to build a hybrid sports car in Finland? originally appeared on BloggingBuyouts on Tue, 29 Sep 2009 12:10:00 EST . Please see our terms for use of feeds.

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Citigroup's Chairman Richard Parsons told the board that he will split his time between Citigroup (NYSE: C) and Providence Equity Partners, a private equity firm. Is this the right time to be changing his focus just as Citi tries to climb out of its deep hole?

Citi is not ready for prime time if it's still raising funds using the FDIC's bond guarantee facility. Why would Parsons shift his focus just when Citi is in negotiations with the government to start weaning itself from its help?

It seems that Parsons is more interested in satisfying his own need to be part of the media industry rather than the needs of Citigroup and its investors. Parsons was the former chief executive of Time Warner and is a close friend of Providence's founder Jonathan Nelson.

Providence owns media companies like Metro Goldwyn Meyer, Hulu, and Univision. Its investment success has been mixed. It has money makers such as Hulu and the Education Management Corporation while its investment in MGM appears to be underwater. Some analysts have raised questions regarding whether Univision can be successfully turned around.

Citigroup has been a lender in previous Providence deals, so Parsons will have to recuse himself when Providence issues come to the board at Citigroup. Parsons currently had no role in making loans or renegotiating the terms of previous loans.

Parsons retired from Time Warner's board earlier this year and obviously wants back into the media deal making world. He is expected to serve as an adviser to Providence's management team on future deals, as well as managing portfolio companies. He is not expected to make deals himself, but will likely be called upon to help in negotiations.

Lita Epstein has written more than 25 books, including Trading for Dummies.

Sorry Citi, but Dick Parsons has a private equity career to run originally appeared on BloggingBuyouts on Wed, 16 Sep 2009 16:50:00 EST . Please see our terms for use of feeds.

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The question that I haven't seen answered in any of the articles relating to the partial acquisition of Skype from eBay (NASDAQ: EBAY) by a team of private investors is, who will own the underlying IP that runs the Skype P2P communications network?

That question must somehow have been answered if savvy investors such as Silver Lake Partners and Netscape founder Marc Andreesen's investment fund, felt comfortable forking over $1.9 billion to eBay.

And as TechCrunch's Mike Arrington points out, eBay did okay on this deal, emerging with a paper gain and still some share of any potential upside.

Under the covers, question still lurk. The two controversial Skype founders, Niklas Zennstrom and Janus Friis, are embroiled in a bitter legal dispute with eBay, which originally purchased the company from the duo for $2.6 billion. Friis and Zennstrom, who once avoided U.S. soil to avoid litigation by the recording industry, claim that eBay does not own the software the powers the Skype network. Rather, they say that the software IP is merely licensed to eBay by Joltid, an entity the duo still controls. How the Skype guys pulled this off without raising massive red flags on eBay's legal team is unclear. Somehow they did. eBay's CEO John Donohoe said that the new Skype deal does not resolve the legal dispute, according to Dow Jones.

And now it's left to Silver Lake and company to unravel that legal Gordian knot, appease the two founders and somehow wrangle a perpetual license or something similar for Skype. Such an insurance policy would be a mandatory if Silver Lake and other investers are going to be able to sell Skype off, which certainly is their ultimate goal. Friis and Zennstrom have proven particularly adept at avoiding such commitments.

Analysts are bullish, saying the deal frees Skype to operate on its own outside the suffocating confines of eBay. They also cheered the return for eBay shareholders. The deal valued the Skype unit at $2.75 billion, significantly more than the $2 billion valuation pegged to Skype several months ago. Surging revenues at Skype surely had something to do with this -- it was the fastest growing unit of eBay and on track to do $600 million in revenues this year.

The value of Skype is so huge and growing so rapidly that the big guns probably figure that dealing with the founders -- and they will have to deal with them whether they want to or not -- is worth the risk.

Questions linger about Skype deal originally appeared on BloggingBuyouts on Wed, 02 Sep 2009 14:40:00 EST . Please see our terms for use of feeds.

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If conventional wisdom mattered, super venture capitalist Vinod Khosla could not have picked a worse time to launch a massive venture capital fund focused on extremely risky green technology investments. Yet Khosla, a VC legend in Silicon Valley, not only pulled it off but ended up with money away, according to the New York Times.

In fact, many of Khosla's investors are gun-shy state pension funds, still smarting from nasty losses suffered in venture capital and private equity placements that went horribly wrong in the economic meltdown of the past two years.

Such is the measure of Khosla's stature in Silicon Valley, where the name of this former partner in top-tier VC fund Kleiner Perkins and the co-founder of Sun Microsystems is synonymous with gutsy, contrarian, go-for-broke investing.

Big investments never scared Khosla, who began investing his own money into his own venture capital fund several years ago, making big bets on a slew of green technology startups, ranging from a cement maker that captures carbon emissions to a biofuels startup that hybridizes algae to product oils suitable for motor vehicle operations.

While other VCs have frowned on so-called science experiment investments that explored unproven and technically difficult technologies, Khosla sees these types of investments as a core function of venture capitalists that was somehow lost, according to the New York Times article. In addition, many Silicon Valley venture capitalists have turned their backs on cleantech investing, according to VentureBeat. Venture capitalists fear that cleantech companies generally require large amounts of startup capital. High-funding demands are a clear obstacle during a time of wholesale shrinkage in the VC sector.

For his part, Khosla has not shied away from cleantech to date and, rather, has poured his own money into his own private investment fund. In that still running fund, Khosla pledges profits to charities. In the present fund, Khosla is looking for pure profits and is accepting limited partners -- that is, outside money.

The $1.1 billion actually will go to two closely related funds. The larger is a $800 million fund that will place investments of $5 million to $15 million in more established technologies. The other is a fund of $275 million that will be used to make smaller investments of $2 million in earlier stage technology companies.The fund is the largest launched since 2007 and one of the largest ever launched for cleantech. Khosla and several partners have invested hundreds of millions of their own money in the fund, a point that was likely key in attracting outside investors.

Khosla's resolve is admirable, particularly in light of the dark winds sweeping the venture capital landscape and the economic difficulties facing many cleantech companies in the photovoltaic solar cell market and biofuels sectors. For sure, a billion bucks can pick a handful of winners, particularly when Khosla has the pick of the litter in cleantech startups due to the reticence of so many of his peers.

Vinod Khosla launches $1.1 billion green fund originally appeared on BloggingBuyouts on Wed, 02 Sep 2009 08:10:00 EST . Please see our terms for use of feeds.

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eBay Inc. (NASDAQ: EBAY) announced Tuesday that it has reached an agreement to sell most of its stake in Skype in a deal that values the online telecommunications service at $2.75 billion. eBay will get $1.9 billion in cash and a $125 million note from the buyer.

An investment group led by the private-equity firm Silver Lake, including Index Ventures, Andreessen Horowitz, and the Canada Pension Plan Investment Board, will buy the 65% stake in the company. eBay, which will retain a 35% stake, expects the deal to close in the fourth quarter of this year.

Of course, eBay President and CEO John Donahoe said the deal is "great." It could certainly be seen this way as ever since eBay bought Skype for $3 billion in 2005, it has been considered as one of the worst tech deals in recent years. eBay failed to integrate Skype fully into an echo-system of e-commerce (the marketplace auction business) and online payment system (PayPal) that works to enhance the value of each.

So when Donahoe says "We've acted decisively on a deal that delivers a high valuation, gives us significant cash up-front, and lets us retain a meaningful minority stake with talented partners," I'd venture a guess that many investors would agree with that statement.

Now the question is whether Skype can operate well as a separate company and manage to compete and grow better in that area. Obviously, the buyers would like to believe that it can. Egon Durban, managing director at Silver Lake, said: "Skype is an innovative, next-generation company that has changed how people and businesses communicate with each other." I guess that when you pay over $2 billion for a stake in the company that generated revenues of $551 million in 2008, you'd like to believe that.

Indeed, while the 2008 revenue was a 44% increase compared to 2007, in 2009, revenues are expected to be more than $600 million -- only a 10% growth. The problem is that unlike other growth stories, Skype hasn't really delivered. Perhaps I should say "yet" and it might start showing some of that promise soon as an independent company. I'm not holding my breath.

eBay strikes $2.75 billion deal for Skype originally appeared on BloggingBuyouts on Tue, 01 Sep 2009 11:40:00 EST . Please see our terms for use of feeds.

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Like many other institutional investors, China's sovereign fund pushed much of its asset base into cash during the market downturn. That hurt the hedge funds where much of the money had been placed and industries the Chinese had begun to invest in around the world.

China is beginning to deploy large amounts of capital from China Investment Corp. (CHIC) again. The fund has about $300 billion in assets.

According to Bloomberg, China Investment has invested "many times" the $500 million that CIC was reported to have placed in hedge funds and private-equity firms in June.

The change of heart is an important one, not just for money managers. CIC put money into a number of financial institutions in the West only to see a great deal of it lost in the financial collapse last year. It now appears that the wounds that come with those investments are no longer holding the Chinese back.

The news about CIC is part of a larger, and not entirely welcome, phase of China putting money overseas. Recently an attempt by Chinalco, backed by central government money, to buy Rio Tinto (NYSE: RTP) was rebuffed, causing tension between the mainland and Australia. China has had more success in the oil and gas sector. It recently loaned Brazilian oil giant Petrobras $10 billion for its important off-shore drilling program. China has also shown interest in the oil production in Iraq.

China is using the recession to buy assets that are less expensive than they would be in normal economic times. It is probably also driving hard terms on the fees it pays to hedge funds. In an era when capital is scarce, big money can, to some extent, make its own rules.

There are growing concerns about what China's overseas strategic aims are as its puts more capital outside its borders. But, many institutional money managers and developing countries don't care. Cash is cash.

Douglas A. McIntyre is an editor at 24/7 Wall St.

China moves back onto global investment stage originally appeared on BloggingBuyouts on Sun, 30 Aug 2009 10:40:00 EST . Please see our terms for use of feeds.

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For a company named after a mythical, multi-headed hound, Cerberus is definitely in the dog house with its investors. The huge private equity firm is being deserted by many of its key clients, continuing a trend of fund flight that has intensified in the past year. Several media outlets reported that 71% of the investors in the firm's two large funds want their capital returned. The money these clients have with Cerberus totals $5.5 billion, putting the New York-based investment manager in a tough position.

Clients are requesting that their money be moved to a newly created pool of assets that will be sold off as market conditions improve. According to The New York Times, "the loss of fee income on more than $5.5 billion in capital could prompt talented traders and investment professionals to leave for better-paying firms, one Cerberus investor said." The firm might survive the drain of funds, but would end up being a much, much smaller operation.

Cerberus attempted to make money by buying into the domestic auto business at what it perceived to be the bottom, buying control of Chrysler and assets in car parts companies. Unfortunately for Cerberus clients, Detroit's demise had only just begun.

"We have been surprised by this response," Cerberus chief Stephen Feinberg and co-founder William Richter wrote in a letter delivered to clients late Thursday, according to a report in the Wall Street Journal. Cerberus began a restructuring plan that gave investors an option to leave the fund, but hoped to persuade them to move their assets to a new fund within Cerberus. Feinberg wrote in his letter that "investors still support Cerberus' investment strategy and its long-term performance."

Cerberus lost nearly 25% of its assets last year, which was not bad, given the market's performance. Apparently, however, its customers don't see it that way.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Cerberus investors ask for their money back originally appeared on BloggingBuyouts on Sat, 29 Aug 2009 09:10:00 EST . Please see our terms for use of feeds.

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While eBay (NASDAQ: EBAY) said earlier this year that it was planning to spin off Skype in an initial public offering in 2010, it is now being reported that eBay is looking for a buyer willing to pay $2 billion or more for the internet telephone service provider.

Those interested in a buyout may include Andreesen Horowitz and Index Ventures, which were early investors in Skype before its eBay acquisition in 2005. A group of well-known venture capital and large private equity firms are pooling resources to join the bid, according to a source close to the deal.

It's expected that if the investor group is successful in acquiring Skype, it would run the company privately and prepare it for an eventual initial public offering. It isn't clear if current Skype CEO Josh Silverman would continue to lead the company after any acquisition. Under Silverman, Skype grew revenue to $551 million last year, and eBay has said it expects the company to top $1 billion in revenue in 2011.

eBay bought Skype for an estimated $3.3 billion in 2005 in one of the biggest venture capital deals in Europe. Following the deal, Skype founders Niklas Zennström and Janus Friis established venture capital firm Atomico Ventures, based in London, but they retained ownership in the key technologies of the Skype platform. Zennström and Friis were reportedly in talks with several private equity firms earlier this year to make a bid for Skype.

Investor group prepares bid for Skype originally appeared on BloggingBuyouts on Fri, 28 Aug 2009 10:10:00 EST . Please see our terms for use of feeds.

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Noted venture capitalist Bill Gurley of Benchmark Capital speculated this week, on his blog "Above the Crowd," about the near-term future of his industry. In short, it is not very bright. Gurley outlines why he thinks the sector is headed for a catastrophic but much needed contraction on the order of 50%. This is particularly bad for the ranks of marginal VCs who have enjoyed drawing hefty salaries for managing funds that now appear worthless.

But the contraction will be very good for the future of the VC segment. Says Gurley, "We have seen over and over again how excess capital can lead to crowded emerging markets with as many as five to six VC-backed competitors. Reducing this to two to three players will result in less cutthroat behavior and much healthier returns for all companies and entrepreneurs in the market."

His rationale, however, is somewhat different from that of other observers, who have noted that returns on venture capital are way down from peaks reached during the dot-com bubble and the relatively frothy six-year aftermath. Gurley believes that the biggest culprit in the VC winnowing is a dramatic reduction in VC investments by large institutional investors.

Such investors had dramatically upped the percentage of their portfolios dedicated to so-called alternative assets (meaning things that can't be readily traded, such as hedge funds, venture capital, private equity, and real estate). Now, those investors, which include many leading pension funds and university endowments, are forced to correct in the other direction as their portfolios are top-heavy on these alternative investments and light on stocks and bonds that can be easily traded -- precisely when demand for cash is rising.

What's more, Gurley points out, many of these institutional investors committed large sums of future cash to investments in venture capital, leveraged buyout, and private equity funds. Those future commitments make it nearly impossible for an institutional investor to enter into any new venture capital commitments. Which is why VC funds trying to raise new rounds are having a very tough time.

Gurley is a little late to this party. Econoblogger Paul Kedrosky published a paper for the Kauffman Foundation outlining a similar argument for a 50% decline in the total size of the venture capital industry last June. And Union Square Ventures' Fred Wilson made an argument for a much diminished VC industry in May of 2009.

Further, Gurley does seem to sugar-coat the issue a bit in one key sense. The venture capital crash has been so vicious that many large institutions appear to have been left with a very bitter taste regarding promised sweet rewards that never materialized. Witness the brutal commentary by Harold Bradley of the Kauffman Foundation on why the economics of the typical venture capital fund structure primarily makes sense for the venture capitalists themselves.

This might be an instructive issue for Gurley and other venture capitalists to address -- why they are getting paid 2% of the fund asset base and 20% of profits in a glutted industry when perhaps a more rational structure might be closer to 0.5% and 15% of profits.

Top venture capitalist predicts his industry will shrink by 50% originally appeared on BloggingBuyouts on Wed, 26 Aug 2009 15:10:00 EST . Please see our terms for use of feeds.

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Vibe Media Group, publisher of hip-hop magazine Vibe, shut down in June, as the poor economy led to declining advertising revenue. Vibe has since been acquired for an undisclosed price by InterMedia Partners, a private equity firm.

InterMedia said it plans to resume publication of Vibe in November as a quarterly magazine. The operations of Vibe are to be integrated with those of Uptown, another urban lifestyle magazine InterMedia owns. Publishing veteran Jermaine Hall has been named as the new editor-in-chief of Vibe, and the new business will be known as the Vibe Lifestyle Network.

Meanwhile, Creative Loafing, the Tampa-based alternative newspaper chain, will soon be in the hands of New York-based private equity firm Atalaya Capital Management. In an bankruptcy auction for the chain, Atalaya's $5.0 million bid beat out that of the newspaper's publisher, Ben Eason, the only other bidder.

Creative Loafing got into trouble in 2007 when it took on about $40 million in debt to purchase the Washington City Paper and the Chicago Reader. When the economy plummeted, Creative Loafing's advertising and other revenues were hit hard, leaving it saddled with debt.

Atalaya says it will continue operating the chain, which includes six alternative newspapers.

Even as signs suggest the economic slump could be coming to an end, newspapers and other print publishers continue to struggle. Is it a good time to be investing in the sector? Will we see more private equity interest in print publishers?

Vibe and Creative Loafing: Private equity moves in print publishing originally appeared on BloggingBuyouts on Wed, 26 Aug 2009 08:40:00 EST . Please see our terms for use of feeds.

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Bruised by a weak economy and hostile takeover fight, Charlotte Russe Holdings Inc. (NASDAQ: CHIC) is going private.

The chain of mall-based clothing stores catering to young women agreed to sell to Advent International Corp., a $24 billion investment group that has already made investments in other apparel retailers including activewear chain Lululemon Athletica (NASDAQ: LULU) and British discount apparel chain New Look.

The two sides didn't give details on when they hope to close the deal, which is valued at $380 million.

Charlotte Russe has been hit by heavy competition, lower mall traffic, and a weak economy. Last month it reported a sales increase of 4.9% for the quarter ended June 27, but same-store sales were down 3.6% from the same time last year, and same-store sales for the first nine months of the fiscal year were down 7.1% below 2008.

After a disappointing holiday season and an attempted hostile takeover, the clothing chain announced in January it was looking at "strategic alternatives." In March, management said it had hired Cowen & Co. to look for buyers.

Charlotte Russe fought back a hostile takeover late last year by investment company Karp & Reilly, which offered $9.00 to $9.50 per share. Management turned the offer down as too low, sparking a proxy fight that dragged on until the company's annual meeting in April.

In a statement, chairman Jennifer Salopek underlined how Advent's $17.50 per share offer is 255% above where the company's stock was trading in January.

Of course, the markets had recovered considerably since hitting bottom in March, and knowing the company was up for sale must have attracted investors who anticipated that a buyer would pay a premium. The offering price was only 26.9% over Friday's stock close, and investors kept bidding up the stock; it rose almost 26% Monday to hit $17.35.

So, other than a sudden reversal of fortune, anyone hoping to cash in on this deal is already locked in place. Too bad for Karp & Reilly, which had accumulated a nice stake during its takeover try, but sold it after dropping its offer at around $12 a share.

Charlotte Russe to go private in $380M deal with Advent International originally appeared on BloggingBuyouts on Tue, 25 Aug 2009 08:40:00 EST . Please see our terms for use of feeds.

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