bloggingbuyouts

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.

If you've ever wondered why so many low-P/E ratio technology companies haven't been gobbled up, there is a really good explanation: R&D, leverage, and volatility.

Business Week just ran a great cover story titled "When a Buyout Goes Bad" for this week's magazine. The case in hand is the old private equity buyout of Freescale, which was the chip business from Motorola Inc. (NYSE: MOT). This talks about a company that was turned around from the edge of the cliff by a great tech leader who created a great stock again. Then the $17.6 billion buyout came from a group led by The Blackstone Group (NYSE: BX), Carlyle Group, and Permira Advisers. This buyout came after being in a competing bid from a consortium led by KKR, Bain Capital, Apax Partners, and Silver Lake Partners.

Last year the company's revenues fell 10% while the chip sector revenues grew by 5%, then Motorola announced a spin-off or sale of its handset business, and then there is the issue of the $9.5 billion in debt that was clumped on top of the company to get the private equity buyout done.

Unless you are selling transistors and capacitors or just plain Jane DRAM, technology companies require heavy R&D commitments. This is why historically technology companies used to come public back before the 1990's "get rich from tech stock option awards" became the norm. The accounting changes required investor backers of a different group to mark down 15% of their $7 Billion stake as well. In fact, it notes that it is having a hard time ponying up the $1.2 billion for R&D and $400 million for capital expenditures needed for Freescale. And now there are inventory problems.

For me personally, I am not all that surprised that Freescale was a temporary success. One night right shortly before Freescale was spun-off by Motorola, I was flying from Austin to Chicago. I spoke to two workers that said they were low level managers for Freescale. When they called the company "Free-Fall" and told me about some of their pension or retirement issues and stock option plans getting mixed up (not for the better, at all), it left a bad taste in my mouth. Then when this one went private with that much debt and knowing what comm-chip R&D percentages of revenue were, I thought the billionaires were drinking too much of the cool-aid.

You should read that article as it puts it well into context. This is why niche technology companies generally end up being acquired by other niche technology companies or by larger tech companies that are competitors or that can complement each other. In mid to late-2006 you started seeing the private equity frenzy go into overdrive.

If you want good news or the silver lining, I do actually have some. I think that there will be another wave of public technology companies that get acquired. But the buyers will almost all be LARGER public technology companies. Private equity and technology can mix, but the deals need to be smaller deals with less leverage and in companies that require less R&D.