PE Week Wire — Friday, July 2

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Trial Watch: A “Bizarre” Verdict

When I sent out emails yesterday that a verdict had been reached in the Connecticut vs. Forstmann Little & Co. trial, some of you wrote in to ask what I was talking about. In order to provide some clearer context, I am first including a news piece I wrote on the verdict last night. After that will be some analysis. After that, I will pack up and head for a rafting trip in Maine:


Forstmann Little & Co. was found liable yesterday of breaching its contract with the State of Connecticut, and for having breached its fiduciary duty. The verdict came less than two days after a Vernon, Conn. jury had begun deliberations on the case, and was notable for its absence of damages awarded to Connecticut. The state had been seeking in excess of $100 million.

“The verdicts are bizarre in some respects because it’s hard to imagine that they could characterize Forstmann Little in a worse light as a professional manager of assets,” says John MacMurray, a private equity attorney with Ropes & Gray LLP. “The jury found that Forstmann Little had committed malpractice in terms of being an asset manager, but the actual outcome is that Forstmann Little won the case because there were no monitory damages.”

The case was first filed in February 2002, and accused New York-based Forstmann Little of breaching its fiduciary responsibility to Connecticut, which had invested a total of $198 million into a pair of Forstmann Little-managed funds. Connecticut also alleged contract law violations, securities law violations and that Forstmann Little had engaged in bad faith practices and unfair dealing. At the time, Connecticut Attorney General Richard Blumenthal said:  “We want more than the $100 million-plus they wasted and wiped out. We want to make Forstmann Little the poster child for fair-dealing in the investment community.”

Opening arguments didn’t begin until June 1, by which point Superior Court Judge Samuel Sferrazza already had thrown out the securities law violations. Two weeks later, he said that the prosecution had not presented sufficient evidence to sustain the bad faith and unfair dealing charges. The final jury verdict found Forstmann Little liable of two counts of contract breach, and one count of fiduciary duty breach.

Ted Forstmann, senior founding partner of Forstmann Little, issued a statement that characterized the jury verdict as a “complete victory” for his firm. Lawyers following the case, however, point out that Forstmann Little now has a black mark on its once-sterling reputation, and that it incurred sizable defense costs. They also say that the entire episode sends a message to other private equity firms that they should develop risk management precautions before being tagged with a lawsuit of their own.

For its part, Connecticut AG Blumenthal said that he was pleased with the verdict, but obviously disappointed in the lack of damages. He added that an appeal was not out of the question.


I’ve covered this case since before it was even filed, and thought that I had written at length about every possible verdict scenario. I was wrong.

The jury apparently felt that the breaches did not materially affect Connecticut’s decision to reinvest with Forstmann Little & Co., and perhaps bought defense arguments that the state was only complaining once certain telecom investments went bad. There also is a chance that the jury has hesitant to award damages after the judge threw out a majority of the charges against Forstmann, although attorneys I spoke with feel that the scenario is a bit far-fetched. It is important to note, however, that those same attorneys were stunned by what is, in essence, a legal victory for Connecticut and a practical victory for Forstmann Little.

Such “split decisions” do happen occasionally, but the feeling here had been that if a jury of Connecticut taxpayers were to find a wealthy New York buyout firm to be liable of breaching its fiduciary duty to Connecticut, then it also would award significant damages. It just didn’t happen, though, and I’d almost have to think that Connecticut has come too far not to at least attempt an appeal.

Almost every major East Coast newspaper is covering the verdict this morning, but the most interesting read is in The New York Times. The Gray Lady has a pure news story, and then a sidebar that suggests the verdict could cause other private equity firms to bar Connecticut from future funds. The money quote comes from John Canning, chief executive of Madison Dearborn Partners, who said: “I can’t imagine anyone inviting Connecticut into another fund. Why would anyone take that risk?” You can read more at (free registration required).

Now I respect John Canning, but his sentiment is suspect. Connecticut has invested in at least four different private equity funds since it first filed its Forstmann Little complaint (which isn’t bad, particularly since it didn’t have a private equity investment chief until last June). In other words, there are private equity firms that gladly have taken Connecticut’s money, even while aware of the legal proceedings. How on earth does a “found liable” verdict – whether damages are assigned or not – make Connecticut seem like a less credible LP. Perhaps if it also had sued other buyout firms (i.e. appear litigation-happy), but this case always has been specifically about Forstmann Little, not the asset class as a whole.

In fact, the real stain here is on Forstmann Little’s reputation, not on Connecticut’s. There have long been rumors that the firm will not raise another fund – at least not one that Teddy Forstmann is directly involved with – and some other current Forstmann LPs say that it’s a good decision. Why? Because they wouldn’t re-up with a firm that made such boneheaded telecom investments, particularly if it also was found liable of breaching contracts and fiduciary responsibility. Teddy’s statement about being a “complete victory” for his firm may have spun The New York Times, but it won’t spin most of the private equity community… 

Kelso & Co. and Church & Dwight Co. have agreed to acquire Del Laboratories Inc. (AMEX: DEL) for $385 million in cash. Under terms of the deal, each outstanding share of Del common stock will be converted into $35 cash. This represents a slight premium for current shareholders, as Del’s stock traded down yesterday at $30.70 per share. The entire transaction is valued at $465 million, including the assumption of $80 million in debt. It is expected to close in the fourth quarter.

TransDimension Inc., an Irvine, Calif.-based provider of USB connectivity solutions for embedded applications, has closed both its Series C and Series D funding rounds with a total of $18.35 million. GKM Ventures led the Series C deal, and was joined by VantagePoint Venture Partners, iSherpa Capital, Rolling Oaks Capital and Shelter Capital Partners. VantagePoint led the Series D round, and was joined by iSherpa. In other TransDimension news, the company announced that it has acquired the peripheral connectivity assets of ARC International PLC for an undisclosed amount.

Forstmann Little & Co. has been found liable of two counts of breach of contract and one count of breach of fiduciary duty, in regards to a lawsuit brought by The State of Connecticut. The jury did not, however, award Connecticut any damages.


Zonare Medical Systems Inc., a Mountain View, Calif.-based developer of miniature ultrasound imaging devices, has raised $34 million in Series E funding. New investor Montagu Newhall was joined on the deal by return backers Frazier Healthcare, Draper Fisher Jurvetson ePlanet Ventures, Earlybird Venture Capital, CB Health Ventures, Merrill Lynch Ventures and Mosaix Ventures.


Voice Genesis, a Los Angeles-based provider of downloadable software for cell phone subscribers, has raised $650,000 in bridge funding, as it prepares for a Series A fund-raising effort. The capital was provided by the Northern California Chapter of the Keiretsu Forum, a nationwide angel investor network.

The Riverside Co.
has sold DHD Holding Corp. (a.k.a. DHD Healthcare) to Smiths Group PLC for $55 million. DHD is a Wampsville, N.Y.-based provider of disposable medical devices for respiratory therapy, and was acquired by Riverside in February 2001. Since that time, the company has acquired both STI Medical Products (July 2001) and Pegasus Research Corp. (August 2003). Harris Williams & Co. served as exclusive advisor to DHD and Riverside on the transaction.

Caisse de depot et placement du Quebec is leading an investor consortium that is buying control of Canadian natual gas distributor Gaz Metro LP. The deal is valued at approximately $670 million (Cdn$625 million), with CDP being joined by BC Investment Management Corp. and SNC-Lavalin.

3i Group has agreed to acquire the Kemira Fine Chemicals unit of Finland-based Kemira Oyj for approximately €70 million.

Pixel Magic Imaging Inc., a San Marcos, Texas-based provider of digital photography software, has received $20 million in new equity funding from Japanese investors Dai Nippon Printing Co. Ltd. and Altech ADS Co. Ltd. The deal grants the new investors a majority stake in Pixel Magic, although its existing investors will remain engaged in the company. Pixel Magic previously had raised around $16 million in VC funding from Southeast Interactive Technology Funds, Sony Corp., Barnard & Co. and Tyco Capital.


SmartBargains Inc., a Boston-based online retailer, has filed to raise $80.5 million via an IPO of common stock on the Nasdaq under proposed ticker symbol SBAR. The company has raised approximately $125 million in total VC funding since its 2000 inception, with significant shareholders including Highland Capital Partners, Gordon Brothers Group, Maveron LLC, America Online Inc., General Catalyst Partners, Madison Dearborn Partners and Berkshire Partners.


UTI Corp., a Collegeville, Pa.-based provider of devices, assemblies and components to medical OEMs, has completed its acquisition of MedSource Technologies Inc. (Nasdaq: MEDT). The deal, which was announced in April, has an aggregate transaction value of $230 million, including debt net, with MedSource common stockholders receiving $7.10 per share. The deal was backed by UTI investors KRG Capital Partners and DLJ Merchant Banking Partners.

Becton, Dickenson & Co. (NYSE: BDX) has paid $25 million to acquire Atto Bioscience, a Rockville, Md.-based provider of advanced technologies for analytical microscopy. Atto had raised nearly $10 million in total VC funding, from investors like Emerging Technology Partners and the Maryland Department of Business & Economic Development.

C.R. Bard Inc. (NYSE: BCR) has acquired substantially all the assets of Onux Medical Inc., a Hampton, N.H.-based provider of medical devices used for tissue fixation. Terms of the deal were not disclosed. Onux had raised around $15 million in total VC funding since its 1996 inception, from investors like Boston Scientific Corp., Domain Associates and Delphi Ventures.

Ethicon Endo-Surgery Inc., a Johnson & Johnson company, has acquired Artemis Medical Inc., a Hayward, Calif.-based developer of biopsy site market technology. No deal terms were disclosed. Artemis had raised approximately $27 million in total VC funding since its 1999 inception, from investors like Bedrock Capital Partners, Perennial Ventures, ProQuest Investments, The Vertical Fund, Vanguard Ventures and W Capital Partners. is reporting that Michel Guillet, John Burgess and Alberto Tazartes all will retire from their managing partner posts with BC Partners within the next 18 months. Guilet will leave this October, with Burgess and Tazartes both leaving at the end of 2005. The moves follow the 2001 retirements of BC Partners co-founders Otto van der Wyck and Patrice Hoppenot.

Sonnenschein Nath & Rosenthal LLC has added Victor Boyajian to its venture capital/emerging growth company practice. He most recently founded the capital markets group at Sills Cummis, where he practiced for nearly two decades.


Richard Kay has been named a special partner with ABS Capital Partners, where he will serve as both an advisor and board member to several ABS portfolio companies. He is the former founder, chairman and CEO of OTG Software, which received VC funding from ABS before going public in March 2000. It later merged with Legato Systems Inc. (Nasdaq: LGTO).

Alan Weinfield has joined Darby Overseas Investments as director of sales development and marketing. He previously served as director of investor relations with Franklin Templeton Investments.

GKM Ventures has held a second closing on its current fund, which doubles its size from $48 million to $97 million. New limited partners include BEA Systems, Cirrus Logic, Cisco Systems, Linear Technology, Citrix, Legato/EMC, Phoenix Technology, RSA Security, Siebel Systems, Texas Instruments and Trimble Navigation. Los Angeles-based GKM also announced that it has opened a new office in Menlo Park, Calif., which will be run by new managing director David Stastny. Paul Sherer and Kai Tse also have joined the Menlo Park office, as a venture partners and principal, respectively. All three men most recently worked with Osprey Ventures.  

Jerusalem Venture Partners (JVP) is planning to open an office in China, according to Chinese press reports. The New York-based firm, which already has one China-based portfolio company, currently is recruiting local staff for the effort. is reporting that Albemarle Private Equity has been removed as the general partner of a £44 million fund it formed in 1996. Approximately 90% of the fund’s limited partners opted to oust Albemarle, and replace it with Nova Capital Management.


Thursday, 7/1


VC-Backed IPO Explosion

I was hoping that we’d be able to discuss a verdict in the Connecticut vs. Forstmann Little case this morning, but it seems that the jury is still out (literally). In the meantime, today is the first day of Q3, which means that some Q2 data already is beginning to emerge. The first set of numbers relates to VC-backed IPOs, and comes to us from Thomson Venture Economics (publisher of the PE Week Wire) and the National Venture Capital Association (publisher of other things).  

Twenty-nine VC-backed companies priced on U.S. exchanges last quarter, for a total take of approximately $2.07 billion. This represents a major increase over the 13 VC-backed IPOs that priced during Q1, and is the highest number of VC-backed IPOs since 87 such companies hit the public markets in Q3 2000. It is important to note, however, that the $2.07 billion figure does not top Q1’s $2.72 billion total, which was skewed by a $1.8 billion IPO from Semiconductor Manufacturing International Corp.

This quarter’s largest deal came just this week, as Life Time Fitness Inc. raised $183.15 million. It priced at $18.50 per share, and closed trading yesterday up at $21 per share. In fact, the vast majority of Q2 IPOs are currently trading above their offering prices (19 above, eight below and one at even money). The biggest percentage gainer so far has been Santarus Inc., which priced at $9 per share and closed trading yesterday at $14.75 per share, for a 63.33% bump.

In general, however, VC-backed companies were unable to hit their target prices. The average VC-backed IPO filing included plans for $87.75 million in expected proceeds, while those same companies ended up with an average of just $70.06 million in proceeds. Among the biggest losers in this regard were a quintet of drug companies that filed to raise $86.25 million, but only ended up with $35 million. They were: Memory Pharmaceuticals Inc., Acadia Pharmaceuticals Inc., Metabasis Therapeutics Inc., Inhibitex Inc. and Momenta Pharmaceuticals Inc. (which actually ended up with just $34.5 million).

Finally, there is the future to think about. Any regular reader of our IPO News section recognizes that there have been a ton of VC-backed IPO filings of late. The pipeline currently includes 79 such offerings, with nearly a dozen scheduled to price over the next month. 


Centrica PLC has agreed to sell driving school and motorist services group AA to Permira Advisors Ltd. and CVC Capital Partners for approximately £1.75 billion.

Camero Inc., a Herzliya, Israel-based developer of micro-power radars that would enable fire and rescue workers to “see” through walls, has raised $5 million in Series A funding. Jerusalem Global Ventures led the round, and was joined by Motorola Ventures and Walden Israel Venture Capital. The company’s system uses ultra-wideband (UWB) technology to generate a 3D image of objects concealed by solid barriers, such as walls.

Thomson Venture Economics (publisher of the PE Week Wire) and the National Venture Capital Association today released Q2 2004 data for VC-backed IPOs. In all, 29 VC-backed companies raised $2.1 billion via IPOs on U.S. exchanges.


ReShape Inc., a Mountain View, Calif.-based provider of chip-level design automation, has raised $12 million in Series C funding. American River Ventures led the deal, and was joined by the Bay Area Equity Fund, which is managed by J.P. Morgan Chase & Co. Return backers included New Enterprise Associates and Canaan Partners. ReShape now has raised $31 million in total VC funding since its 1997 inception, including a $12 million Series B deal in 2002 at a post-money valuation of approximately $30 million.


Allianz Capital Partners GmbH has completed its acquisition of Invensys PLC’s Hanson Transmission business for approximately €132 million in cash.

Clayton, Dubilier & Rice is in advanced talks to buy bottled water distributor Culligan International Co. from French conglomerate Veolia Environnement for $600 million, according to yesterday’s The New York Post.

Rand Capital has sponsored a management buyout of General-Electro Mechanical Corp., a West Seneca, N.Y.-based provider of automatic riveting machines used in the assembly of aircraft components. Rand was joined on the deal by company management and an affiliate of the Erie County Industrial Development Agency.

Baltic Motors Corp., a U.S.-based company focused on importing and selling Ford and Land Rover vehicles and parts throughout Latvia, has received $6 million in private equity funding and $4.5 million in mezzanine funding from business development company MVC Capital (NYSE: MVC). Per terms of the transaction, MVC will control the Baltic Motors board of directors.


Wellcare Group Inc., a Tampa, Fla.-based provider of managed care services, will begin trading on the NYSE under ticker symbol WCG. The company priced over 7.33 million common shares at $17 per share (above its $14-$16 offering range), for a total IPO take of approximately $124.66 million. Wellcare Group was formed in May 2002 by Soros Private Equity Investors, which invested just over $70 million. 


Return Path Inc., a New York-based provider of email performance management solutions, has acquired NetCreations Inc., a provider of permission-based email acquisition and sampling services, from Consodata Group Ltd., a unit of Seat PG (OTC BB: SPGMF). Return Path has raised around $20 million in VC funding from backers Sutter Hill Ventures, Mobius Venture Capital, Flatiron Partners and JPMorgan Partners.

J.P. Morgan Chase & Co. (NYSE: JPM) and Bank One Corp. have completed the merger of their holding companies, with Bank One shareholders receiving 1.32 shares of JPMC stock for each share of Bank One stock.


Arianne Leuftink has joined private equity placement agent BerchWood Partners LLC, where she will work out of the group’s new Amsterdam affiliate. Her initial responsibilities will involve origination, but will expand to include fund placement in Europe once the Dutch affiliate is fully licensed. Leuftink previously served as a managing director with Wilshire Private Markets Group and, before that, as an investment director with IBM Netherlands Pension Fund.

Fred Goad, a founding partner of Nashville-based VC firm Voyent Partners LLC, has joined the board of Emageon Solutions Inc., a Birmingham, Ala.-based provider of visual medical systems.

Jean-Frederic de Leusse has been named chairman of the supervisory board with Credit Lyonnais Private Equity, which recently was acquired by Credit Agricole. De Leusse has been with Agricole since 2001, and replaces Alain Papiasse. In other firm news, Fabien Prevost has joined Credit Lyonnais Private Equity.


JZ Equity Partners, a New York-based mezzanine affiliate of The Jordan Co., says that it has won a U.S. Supreme Court decision in its anti-trust case against 3M Corp. (which had appealed a lower court ruling). The suit was brought on behalf of JZ investee company LePage Management Co. LLC, which now will receive a $25 million payment next week from 3M, as part of an $87.5 million judgment. 



    Wednesday 6/30


Scattered Notes

A huge news day, particularly on the IPO front, so just a few quick items: (1) An enormous email response to yesterday’s “Fahrenheit 911” column. I’ll get into greater detail during Friday Feedback, but it’s safe to say that the majority of respondents were cross with me for not fulfilling their dogmatic ideals. For example, alternate emails accused me both of “hating America” and being a “Bush apologist.” Since any discussion of this film seems to embody a talk radio-like feel, let’s just say that phone lines are still open. (2) Michael Young has taken over the MLB at-bats lead from Ichiro, which means that Todd Thompson of Piper Jaffray & Co. has taken over our contest lead. (3) I’m writing an article that touches on the increasing polarization between “haves” and “have-nots” in the limited partner community, particularly when it comes to investing in VC funds. The piece is almost done, but any interesting thoughts on the matter would be greatly appreciated… 


Kohlberg Kravis Roberts & Co. in April agreed to acquire satellite operator PanAmSat Corp. for approximately $4.3 billion, including $750 million of net debt. In an SEC filing yesterday, however, KKR unveiled plans to sell a majority of PanAmSat to a pair of buyout shops that had lost out on the original auction. Under terms of the agreement, The Carlyle Group and Providence Equity Partners each will purchase a 27% stake in PanAmSat once the original KKR buyout closes, with KKR retaining a 44% interest. Company management will retain the remaining 2 percent.

Worldspan Technologies Inc., an Atlanta-based provider of airline ticket transaction services, has postponed its proposed $677.25 million IPO. The company issued a press release claiming that the decision was “due to current market conditions,” and that it would “continue to evaluate market conditions and may proceed with a public offering at a later date.” Worldspan was founded in 1990 by Delta, Northwest and TWA (later acquired by American Airlines). In 2003, Citigroup Venture Capital and the Ontario Teachers’ Pension Plan Board acquired all interests in the company via a buyout that included an aggregate consideration of $901.5 million, plus a $250 million nine-year credit agreement with Delta and Northwest whereby the airlines would continue to use Worldspan for various IT services.

Advent International has held a $125 million final close on its third healthcare-focused VC fund, named Advent Healthcare & Life Sciences III. The fund already has a pair of portfolio companies – AlgoRx Pharmaceuticals Inc. and Millimed Holdings Inc. – and counts drug developer AstaZeneca as a major limited partner.


Q1 Labs Inc., a Waltham, Mass.-based network security company, has raised $11 million in third-round funding. Globespan Capital Partners co-led the deal alongside return backers Menlo Ventures and Polaris Venture Partners. Previous investors BDC Venture Capital and New Brunswick Investment Management Corp. also participated. The company now has raised $29.4 million in total VC funding since its 2001 inception.

RelayHealth Corp., an Emeryville, Calif.-based provider of online doctor-patient communication services, has raised $10 million in new VC funding. Conning Capital Partners led the deal, and was joined by return backers Venrock Associates, U.S. Venture Partners, Lilly Ventures and SI Venture Management. The company now has raised over $55 million in total VC funding since its 1999 inception.

Kotura Inc., a Monterey Park, Calif.-based provider of opto-electronic products for the optical communications industry, has raised $11 million in new VC funding from existing investors ComVentures and ARCH Venture Partners.

SmartTime Software Inc., a Framingham, Mass.-based provider of workforce management solutions, has raised an undisclosed amount of VC funding. Baird Venture Partners led the deal, and was joined by Zon Capital Partners.

Kohlberg Kravis Roberts & Co. has agreed to acquire German car parts and repair company Auto-Teile-Unger GmbH (ATU) from Doughty Hanson & Co. for approximately $1.75 billion. Doughty Hanson acquired the company in 2002, and originally had planned to float ATU on the public markets.

ABN AMRO Capital has led a management buyout of Finland-based homeware design company Iittala. No deal terms were disclosed. The private equity firm also announced that it has sold portfolio company UNICA, a Spain-based cleaning services company, to the Spanish subsidiary of Denmark-based ISS for approximately €73 million.

Falconhead Capital has sold online and catalog golf retailer The Golf Warehouse to The Sportsman’s Guide Inc. (Nasdaq: SGDE). The transaction is valued at approximately $30 million. Thomas Weisel Partners served as financial advisor to Falconhead on the deal.


Collegiate Funding Services Inc., a Fredericksburg, Va.-based education finance company, has set its IPO offering price range to $15-$17 per common share, and its number of offered shares to over 9.37 million. In addition, the company set its proposed ticker symbol on the Nasdaq to CFSI, and added Citigroup Global Market, CSFB, Banc of America Securities and Keefe Bruyette & Woods to its underwriters list. Collegiate lists both Lightyear Capital and TCW/Crescent Mezzanine Partn