Doughty Hanson Uses Knowles for U.S. Toe Hold –

Just six months after it stormed U.S. shores and set up a New York office to prospect for deals, U.K.-based Doughty Hanson has notched its first agreement to acquire a U.S. based company.

The firm last month agreed to pay approximately $520 million for Knowles Electronics Inc., a privately held manufacturer of hearing aids, and may have set the stage for full-scale international battle by G.P.s from mega-buyout firms.

While the assault on Europe by U.S. private equity groups has been well-documented-with such firms as Kohlberg Kravis Roberts & Co., Clayton, Dubilier & Rice, Texas Pacific Group and The Carlyle Group already having set up London offices, and the recent hard-fought victory by Hicks, Muse, Tate & Furst Inc. to acquire Hillsdown Holdings PLC (see story, p. 14)-few European groups have turned the tables on the invading Yanks.

3i, the largest private equity firm in the U.K., already has followed Doughty Hanson’s lead and will open U.S. offices in Palo Alto, Calif. and in the Boston area (BUYOUTS May 3, p. 3). However, 3i’s offices likely will focus predominantly on venture capital investments, thereby leaving Doughty Hanson as the only U.K. firm prowling the U.S. for control investments.

According to a source at Doughty Hanson, the Knowles acquisition and the flood of large U.S. firms entering Europe now could result in a handful of private equity groups that will be known as truly global players. “Clearly, I don’t know of any business that has more competitors than the private equity industry,” the source said. “There is probably only room for four or five global players, but we could probably be the only U.K. player out of them.”

Whether Doughty Hanson succeeds in this lofty goal likely will be impacted by the success of international stand-alone investments such as Knowles.

The source declined to disclose the amount of equity that Doughty Hanson will contribute to acquire the Itasca, Ill.-based company but noted that Chase Manhattan Corp. will provide senior debt. In addition, Morgan Stanley Dean Witter also will attempt to raise approximately $150 million in high-yield debt.

Knowles manufactures transducers and other parts for hearing aids and also makes acoustic components used in voice recognition, telephony and Internet applications. The company had EBIT of approximately $53 million on 1998 revenue of roughly $228 million.

Banking on a Voice-Activated Future

The source said Doughty Hanson was attracted to the company by its strong market position-it currently holds more than an 80% market share on hearing aid and microphone components-and its cutting edge technology in acoustic devices pertaining to voice activated electronics.

In addition, the source noted that since the company had been a family business, there might be more room for operational improvements than if it had been acquired on the public market.

The source declined to say whether Doughty Hanson would be shopping actively in the U.S. market for add-on acquisitions for Knowles but did say the firm likely will be making more U.S. stand alone acquisitions in the next year. “Our funds are now so large that there is no way we can invest enough money in non-international companies,” the source said.

Doughty Hanson opened its U.S. offices in the first quarter, hiring Kevin Luzak, a former investment banker with Salomon Smith Barney, to head the effort (BUYOUTS Dec. 21, 1999, p. 1). The firm in the last quarter has added Jacqueline Reses, formerly with Goldman, Sachs & Co.’s mergers & acquisitions group, and Harry Green, formerly with Donaldson, Lufkin & Jenrette’s high-yield financing group, to supplement the team.