Today Silver Lake has announced the closing of the Silver Lake Sumeru fund for $1.1 billion in capital raised. Silver Lake is a leading private investor in technology and the fund represents its first middle-market investment fund. The fund will specifically focus on growth opportunities in sectors such as hardware, software, internet, and technology-oriented services that are in the midst of the transformation shift in performance or growth.
Silver Lake works with existing management to add value in investments and push growth opportunities. Here are some current deals it has been involved in:
In the end of 2007, Silver Lake Sumeru acquired a majority stake in Mobile Messenger and is providing capital and operating experience for mobile content management and distribution.
In April 2008, Silver Lake Sumeru financially supported the merger between AVI and SPL to create the world's largest video and audio conferencing provider.
Also open to divisional spin-offs, Silver Lake Sumeru recently signed a definitive agreement with ChoicePoint (NYSE: CPS) to acquire their i2 division which is ChoicePoint's investigative analysis and visualizations software division.
Last year, Silver Lake closed its Silver Lake Partners III, a fund that focused on large-scale investments in technology companies for a total of $9.3 billion in equity commitments. Combining this fund with Sumeru, Silver Lake has $10.4 billion directed toward technology investments. Silver Lake now manages a total of $16 billion in assets.
We recently noted the woes of private equity and capital intensive needs of many technology, particularly with Freescale. Some companies flat out just need to be public, but there are always opportunities around.
The Wall Street Journal has an interesting article discussing the changes that are surrounding the debt markets currently in private equity, and this plays right into how it looks like there is a major de-leveraging coming across the board. It is no real secret about private equity firms are having to change many of their ways. The days of the giant double-digit-billion dollar club deals using all O.P.M. for the debt are gone.
Private-equity deals are changing to where the buyout firms seek internal leverage from their investors and partners instead of using third party lenders. Due to the recent volatility, sellers are often more concerned with closing a deal at a locked-in and certain lower price using internal debt than dealing with the hassle of third party lending. The banks aren't totally out of the game, but they have their own troubles and are trying to avoid anything now in new placements that has any real shot at causing future markdowns. This plays right into that article from last week noting that some bank lawyers were even advising clients to just walk away and pay break-up fees.
Big buyout firms that were named in the WSJ article are Carlyle, TPG Capital and Silver Lake Partners, which have utilized this tactic in the past. They are finding themselves calling their investors much more frequently to finance deals. Buyout firms with the ability to utilize their own financing are even at an advantage at the bargaining table. This is what I have been expecting since mid-2007 when the buyout craze was peaking.
If things continue to slow sharply in the economy and if the pressure for de-leveraging continues, the private equity will truly look like private equity again rather than its 2007 masquerade as LBO firms. I actually think there is a bit of good news here. Private equity firms will go back to smaller and less leveraged deals that make more financial sense rather than the sense being around having to commit their raised funds in order to avoid redemptions.
With the deal market drying up, private equity firms need to find unique niches. One player that has been quite successful at this is Silver Lake Partners, which focuses primarily on tech deals. Some of its transactions include Flextronics, Avaya, Sabre Holdings and SunGard Data.
Silver Lake is now expanding its franchise. The firm recently hired Charles Giancarlo, the former Chief Development Officer at Cisco (NASDAQ: CSCO). Keep in mind that he was apparently a candidate for the CEO spot.
Then today, Silver Lake announced big news -- the firm has entered a "long-term strategic partnership" with the California Public Employees' Retirement System (CalPERS). The transaction calls for a 9.9% stake in Silver Lake and there will likely be more investments in future funds.
Acxiom Corp. on Monday made a small peace offering to investors when the data services firm said it would repurchase $75 million of its stock. Despite the move, the company's shares remain at roughly half the price Acxiom would have received under a proposed $3 billion buyout that collapsed last month.
Private equity firm Silver Lake and hedge fund ValueAct Capital Partners LP on Oct. 1 withdrew their offer to buy Little Rock, Ark.-based Acxiom for $27.10 per share, one of a number of big acquisitions that foundered amid the credit crisis. The buyers paid Acxiom a breakup fee of only $65 million, with critics slamming the company for not having negotiated stricter terms for the deal, which was announced in May, to ensure its completion. On Monday afternoon Acxiom shares closed up 3%, to $13.40.
Another private equity deal is crumbling. Acxiom (NASDAQ: ACXM), which was to be bought out by ValueAct Capital Partners LP and Silver Lake Partners for $2.25 billion , is now negotiating break-up fees with the firms. The private equity companies had made a $27.10 in cash offer for the data management company.
According toThe Wall Street Journal "one of the issues likely to be discussed is whether the company has breached the deal's material adverse-effect clause." Operating income at the company did drop 89% in the June quarter and the company has made some lay-offs.
But, Acxiom's board may believe that one weak quarter is not material, especially if the trend of the company's business is up. At some point one of the private equity withdrawals is likely to bring a large suit both from a company and its shareholders.
Acxiom's stock holders are facing a share price that is below $20 and will probably drop further on the announcement. They may not take kindly to that.
After years of losing money in its hard drive business, it appears that Japan's Hitachi Ltd. (NYSE: HIT) may be ready to sell. The hard drive business, which Hitachi acquired from IBM in 2002 for $2 billion, has not been profitable for Japan's largest electronics conglomerate since it was purchased, which is too bad. Hitachi makes some great products (including hard drives), but market leader Seagate Technology (NYSE: STX) is too fully leveraged with vertical integration and an ultra-competitive product line.
Will Hitachi bring in an outside investor to help turn the business around, or will it sell the unit completely? At this point in time, Seagate is a touch nut to crack, even for Hitachi. The reason? Hard drives are all Seagate makes, and that segment is apparently not a focus area for Hitachi, even though the company also makes products with cutting-edge technology.
What would private equity do with Hitachi's hard drive business? Merrill Lynch has said many buyout firms such as The Carlyle Group, Kohlberg Kravis Roberts, Bain Capital, and Silver Lake may be interested. You may remember, Texas Pacific Group and Silver Lake bought off Seagate seven years ago and took the company private, only for it to go public again three years later. This handed the partners a nice investment sum at the time, but would this scenario be warranted again in some fashion?
Can Hitachi's hard drive business ever make money in the face of Seagate and other competitors, like Western Digital (NYSE: WDC)? The unit lost $375 million in calendar 2006 -- a 60% bigger loss from the previous year -- and it's unclear whether it will ever be ready to compete in the brutal price environment of the unforgiving hard drive industry.
On July 20th I highlighted the "Dream Come True" in Avaya Inc. (NYSE: AV). At the time, I thought the $17.50 acquisition price could be bested by a competing bidder and the current acquisition price served as a floor. Since this post the stock has managed to trade off several percentage points but I believe the situation has only become more attractive.
The deal is still expected to close in the fall. Assuming the deal closes December 1st (most likely a very conservative estimate) the current annualized rate of return on the deal is roughly 16% -- a very attractive yield if you believe the deal should go through.
Should you believe in this deal's prospects? In my opinion, the answer to this question is an emphatic yes. Interestingly, two of the company's executives agree as they recently bought $1.4 million of stock going into this deal. As a Wall Street Journal article reports [subscription] today, insiders rarely buy stock before their company goes private. This buy exemplifies confidence in the deal's prospects from the inside. The buyers -- TPG and Silver Lake -- have already arranged financing, according to the WSJ piece.
If the chances of the deal being completed remain good, then why would the stock sell-off, you might ask. I think the answer to this question is two-fold. First, nearly every company in the process of an LBO sold off as the credit market showed signs of weakness during the last two months. Additionally, many funds have been cutting their merger arb exposure, likely forcing liquidations in Avaya, among other companies.
Avaya is still an interesting situation. At the current price, you are set to earn a 4-5% absolute rate of return on your money (roughly in-line with Treasuries and CDs). But you would expect to make this in 2-4 months instead of twelve. With the company's executives loading up on shares and the private-equity buyers already having financed the deal, I think the likelihood of this deal being completed remains strong.
Interestingly, 3Com has Citadel Investment Group involved as an activist investor. Citadel, which is Kenneth Griffin's investment vehicle, owns 8.4% of the company as stated by this 13D filing. And one must wonder whether these buyout offers are attributable to this 13D letter from Citadel, which makes it clear that the firm believes that 3Com is deeply undervalued. It's also interesting that Robert Chapman, an activist known for his vicious attacks on management, owns the stock in his fund but doesn't have an activist role.
3Com seems like an interesting acquisition candidate because it looks cheap on a sales basis when compared to its industry. Although the company has trouble actually earning money on its sales, this might interest private equity firms because many believe they can run the company "better" if its privately owned and not publicly traded. 3Com doesn't have any debt after backing out the cash on the balance sheet, and as a result potential acquirers could perform a leveraged buyout and not risk overloading the company's balance sheet with debt.
If you take a look at KKR's prospectus, the firm spends quite a bit of time hiring top-notch talent. And, as private equity deals get huge, it's now a necessity. So, this week, First Data Corporation (NYSE: FDC) said it has retained Michael D. Capellas as its CEO. The company is currently undergoing a $27 billion buyout and the suitor is KKR.
Capellas is a seasoned tech executive. Some of his prior gigs include the CEO of MCI, which he sold to Verizon Communications Inc. (NYSE: VZ). He also was the CEO of Compaq and went through the process of selling the company to Hewlett-Packard Company (NYSE: HPQ). Oh, and he serves on the board of Cisco Systems, Inc. (NASDAQ: CSCO).
In other words, Capellas certainly knows how to prep companies for exits. He also has a strong background with selling complex technologies – and that will be a big help at First Data.
Interestingly enough, he has spent some time as a senior advisor to Silver Lake Partners, which is a top-tier private equity firm.
For more information on the First Data deal, click here.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
The Washington Post thinks the recently announced deal by Silver Lake Partners and Texas Pacific Group to take telecommunications equipment maker, Avaya, Inc. (NYSE: AV), private indicates a perilous decline in credit standards. And the Post thinks this decline will contribute to the end of the takeover boom.
I always feel a bit skeptical when I read these kinds of articles. It's not so much that the logic is flawed, but the timing is often hard to pin down. I am guilty of doing the same thing myself since I wrote something similar last August. And yet the takeover boom refuses to bend to the will of the pundits.
The Post believes there are three reasons why the takeover boom has peaked:
Investors will receive $17.50 a share. That's 4.7% more than yesterday's closing price and 28% more than before speculation about a purchase surfaced on May 29.
This is the latest in a string of high tech LBOs. Recent ones include:
Acxiom Corp. (NASDAQ: ACXM): This computer and database services provider said May 16 it's being bought by Silver Lake and ValueAct Capital Partners LP for about $2.24 billion.
I am not sold on the competitive advantages that will result from this deal. Maybe there's some overhead to be cut but I question how much private equity is willing to invest in R&D to jump start Avaya's product pipeline.
Avaya's stock has been trading in the $13 range. Word is that a buy-out might bring $17.
Avaya has a long legacy in the telecom industry. It has been at one time or another part of the original AT&T and Lucent, which merged with Alcatel last year.
Whether Nortel ends up owning Avaya or not, it is probably a better strategic fit than almost any other acquirer. While Avaya sells the telecom equipment that large companies use, Nortel sell the equipment that large telecom companies use. The odds that there is overlap in R&D and management costs is fairly high. There is also a duplication of public company costs.
With Avaya's stock already above $17, either a buy-out will be announced in the next few days, or there will be some very disappointed shareholders.
Over the past year, the activist hedge fund ValueAct Capital Partners waged a proxy fight against Acxiom Corp. (NYSE: ACXM) and ultimately got a board seat. By having a board seat, not only did ValueAct have some leverage, but I'm sure had a much better understanding of the company.
Well, now for the payoff: Acxiom has agreed to a $2.25 billion buyout.
Interestingly enough, ValueAct has partnered with the traditional private equity firm Silver Lake Partners to pull off the deal.
Acxiom has extensive databases and analytics to help companies with their marketing programs. In fact, it's similar to Alliance Data Systems (NYSE: ADS), which agreed to a $7.8 billion buyout today from the Blackstone Group.
These types of companies tend to have long-term contracts and cater to necessary business functions. Thus, it makes it easier to pile on debt and do leveraged buyouts.
On news of the deal, Acxiom's stock price spiked 15.29% to $27.29 per share. Although, the buyout offer is for $27.10. Thus, it looks like the Street thinks another bidder may come to the table.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Alliance Data Systems (NYSE: ADS) is a data junkie. The firm tracks consumer behavior and helps clients develop cost-effective loyalty and marketing programs.
Now, the company has decided to go private for $7.8 billion; the private equity buyer is the Blackstone Group.
Interestingly enough, ADS is the result of the financial engineering of Welsh, Carson, Anderson & Stowe. Back in 1996, this private equity firm put together a variety of acquisitions to build the marketing giant. Then in 2001, ADS went public.
Now the firm has 600 customers in sectors like financial services, utilities and specialty retailers. What's more, the contracts tend to be long-term (lasting from three to five years). This is the kind of stability that always gets the attention of private equity firms.
Recently, ADS has suffered from a slowdown in earnings and this has resulted in a lagging stock price. I suspect that Blackstone will engage in some cost cutting to get things back on track.
On the news of the deal, ADS's stock price surged 25.73% to $79.16. Blackstone's offer is for $81.75 a share. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
On March 30th, private equity firms Silver Lake Partners and Texas Pacific Group (TPG) completed the buyout for Sabre Holdings. The company has a variety of travel assets, such as Travelocity, Sabre Travel Network and Sabre Airline Solutions.
The deal required $5.4 billion in financing (including fees). Here's the break-down:
Equity from TPG, Silver Lake
$1,386,205,738
First lien senior secured revolving facility
$500,000,000
First lien senior secured term loan facility
$2,400,000,000
Second lien senior secured term loan facility
$700,000,000
Deal background:
Over the past few years, there has been lots of dealmaking in the travel industry. But perhaps the factor that encouraged Sabre to sell out was Blackstone's $4.3 billion buyout of Travelport in June.
By September, Sabre's bankers -- Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS) -- started to place calls to several private equity firms. There was also interest from a strategic party.
By December, Sabre received two formal bids. But it was the offer from Silver Lake/TPG that was the most attractive. The price was for $32.75 per share.
According to the valuation from Goldman Sachs, here's how the deal stacks up with other transactions:
Enterprise Value Multiple of LTM (last 12 months) EBITDA
Total Debt Multiple of LTM EBITDA
Citicorp Venture Capital Equity Partners L.P. and Teachers Merchant Bank/Worldspan, L.P. (March 2003)
5.0x
3.1x
BC Partners and Cinven Funds/Amadeus Global Travel Distribution, S.A. (January 2005)
7.8x
5.4x
The Blackstone Group /Travelport Ltd. (June 2006)
7.6x
6.3x
Travelport Ltd. (a portfolio company of The Blackstone Group) / Worldspan, L.P. (December 2006)
5.5x
4.5x
Sabre Holdings Corporation (based on management estimates for LTM as of December 2006)
10.2x
7.8x
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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