FEBRUARY 2008: HOT DEALS OF 2007
Hot
Deals
By Mark Druskoff
During his 30 years in investment banking, Nick Williams has
had the opportunity to do deals all over the world. Today he
heads up investment banking activities across Oregon,
Washington, Idaho and Alaska for Wells Fargo Securities from
his Portland offices.
After doing deals throughout Europe and the U.S., Williams
notes something different about Oregon. While a
“buy-and-flip” approach to mergers and acquisitions
predominates in some regions, Williams says Oregon business
owners are a more considerate lot.
“This state is not known for generating a
disproportionate number of M&A transactions,” says
Williams. “It’s not characterized by companies
built with the intention of being sold.” Rather,
Oregon business owners take a more holistic approach to selling
their companies.
Management, Williams notes, tends to be “very thoughtful
and look at what’s best for the companies in the long run
and how their company can survive and prosper.” Oregon
business owners, for instance, are more likely to carefully
weigh the consequences of a potential transaction on their
community and employees.
That is particularly the case with Oregon’s large,
multi-generational enterprises that have been attracted to
selling because of record-setting valuations offered in recent
years. “You had to be completely asleep at the wheel to
not realize valuations were at an all-time high,” says
Roy Tucker, a corporate finance attorney for Perkins Coie in
Portland.
Tucker advised sellers on several deals in 2007, including the
$2.1 billion acquisition of Longview Fibre, which was bought by
a Canadian investment firm. Other companies with similar
vintage also went on the auction block, including Tektronix,
founded in 1946, that was acquired for $2.8 billion and closely
held G.I. Joe’s, founded by Edward Orkney in 1952.
Control of the sporting goods retailer passed to
Orkney’s son David in 1976. Then in 1991 the younger
Orkney was succeeded by Norm Daniels, who’d worked for
the company since age 16. Daniels help engineer the acquisition
of the company in 2007 by a Bay Area private equity firm for an
undisclosed amount.
In such situations, strong connections among company
leadership to the company and community alter the strategic
priorities of the sale. “The emotional content in the
decision to sell seems to be a significant one in
Oregon,” observes Wells Fargo Securities’ Williams.
Business sense is not thrown by the wayside, however.
To determine whether the suitor’s offer was appropriate,
G.I. Joe’s board of directors hired the Portland-based
investment banking group of D.A. Davidson. The unit is run by
Brad Gevurtz, who worked on Wall Street for many years before
returning to his Oregon roots. G.I. Joe’s was one of many
deals that Gevurtz and his 12 bankers in Oregon worked on in
2007, a very busy year for M&A. One big reason, asserts
Gevurtz, has been the rise of private-equity buyout firms.
PRIVATE EQUITY HAS RESHAPED M&A, Gevurtz says. “In
the old days, the ’80s and ’90s, when you sold a
company you’d always call the strategic buyers first. Now
you still do, but there might be one strategic bid and five to
10 private equity bids.”
In addition to G.I. Joe’s, private-equity buyers were
also involved with the $51 million buyout of RV maker Country
Coaches, the acquisition of Longview Fibre, and, in a
round-about way, Integra Telecom’s acquisition of a chief
rival.
In March 2007, Portland-based Integra announced an agreement
to pay $710 million in cash and stock to buy Minnesota-based
Eschelon Telecom. According to filings with the Federal
Communications Commission, part of the merger agreement
included a massive $245 million investment by New York-based
private equity firm Warburg Pincus to recapitalize Integra.
Having closed that investment last December, Warburg Pincus
became the single largest shareholder and is nearly a majority
owner, controlling 45% to 47% of both equity and voting
interests in the phone company.
With enormous purchasing power at their disposal, private
equity firms have helped whip M&A markets into a froth.
According to MergerStat, an M&A statistics service, 2007
was the third-busiest on record. If not for dramatic changes in
the financial markets, 2007 could have been a real whopper.
“In the first half of the year, we had an environment
where money flowed freely and [loan] covenants were not too
restrictive,” says Tom Palmer, a partner in the
Portland–based law firm of Tonkon Torp. “The
pendulum has now swung completely the other way.”
Thanks to the subprime mortgage mess, Palmer explains, lenders
have tightened covenants and ratcheted up risk management.
Because they rely on large amounts of debt to finance deals,
private equity’s ability to continue buying companies at
sky-high valuations was seriously hammered.
“There’s no doubt some M&A transactions have
been delayed or derailed due to tightening of the credit
markets,” Palmer says, declining to mention names.
To be sure, the sky isn’t falling, and private equity
still has plenty of money to spend on acquisitions. But on a
broad scale, the events at mid-year opened the door for
so-called strategic buyers, i.e., competitors or
related-industry players, to come to the fore. “Strategic
buyers with cash may have an advantage in this market,”
Palmer says.
MANY LARGE TRANSACTIONS in 2007 involved strategic
acquisitions of Oregon companies. Besides Tektronix, one of the
largest was Portland-based Saber Holdings’ $420 million
acquisition by Electronic Data Systems of Texas. Another
significant deal paired Lucy Activewear with North
Carolina-based VF Corp. for $110 million.
For these companies, acquisition was not an end, but a
beginning. Rather than going public or receiving outside
investment capital, a merger enabled these companies to tap new
sources of funds as well as create an exit for existing
shareholders.
“The M&A environment in Oregon is characterized by
being just one step in the evolution of a company’s
ownership,” says Wells Fargo’s Williams.
In the case of Tektronix’s acquisition, losing the seed
of Oregon’s Silicon Forest to East Coast conglomerate
Danaher seemed like a major blow to the business community. In
the end, however, analysts and observers agreed the Beaverton
tech manufacturer had to do something to revive its flagging
business. Merging with the larger Danaher created new
opportunities for Tektronix that gives it a new future.
For fast-growing software company Saber Holdings, acquisition
by EDS was comparable in many ways to an IPO. The two
co-founders, CEO Nitin Khanna and President Karan Khanna,
continue to run their company while retaining a 7% ownership
stake, worth more than $31 million based on the company’s
sales price.
Lucy Activewear’s sale provided liquidity to its
existing strategic investors, including several venture capital
firms and national retailer Chico’s, which had invested
$10.4 million in Lucy in 2005. Furthermore, Lucy obtained a new
platform for growth by aligning itself with VF, a $5 billion
branded-apparel maker.
REGARDLESS OF SUBPRIME woes or tightening credit markets,
The New York Times
recently reported that strategic buyers are expected to
continue to actively acquire companies, including young
up-and-coming enterprises. That’s good news for the
dozens of Oregon companies that are busy raising venture
capital and growing themselves into worthwhile acquisition
targets.
In 2007, although no Oregon companies conducted an IPO, more
than 37 Oregon companies raised more $275 million in venture
capital financing, making it the third-best year on record.
Recipients included companies such as Jive Software, which
raised $15 million from Silicon Valley’s Sequoia Capital;
and MyStrands, which brought in a whopping $55 million from
Spanish investors for its online music-recommendation engine
(see related story on page 9); and Portland-based Ambric.
Ambric CEO Howard Bubb says the company is in the process of
closing a second round that could be as much as $30 million,
bringing the total VC raised to more than $50 million. The
money will go into rolling out the company’s line of
programmable microchips to be used in high-powered
applications, like video processing.
For the time being Bubb says debt market worries and subprime
woes are a distant concern. “We’re at the B stage;
we’re ramping technology and sales, so the slowdown in
M&A has no impact on us.” Bubb’s confidence
comes from having gone down this road before.
Throughout the 1990s, he served as CEO of Dialogic, which he
took from almost no sales to $400 million in revenue. The
company then went public and was acquired by Intel in 1999. He
stayed on at Intel until deciding to join Ambric, which was
founded in 2003. Taking the job meant relocating from his East
Coast roots to Oregon, but Bubb is very bullish on the
state.
“I think it is safe to say I could have gone
anywhere,” says Bubb. “But I picked
Portland.” He says the city has a high-quality pool of
technical talent in semiconductors and software, thanks to
companies like Tektronix and its spin-offs. He points out that
numbers of Oregonians commute daily to work in Silicon Valley.
“Portland is a suburb of Silicon Valley,” says
Bubb. The city attracts talent by offering a lower cost of
living with a comparably high quality of life. For Bubb, that
translates into a more stable workforce.
Building a deep bench of talent is essential because the
company plans to grow substantially. By 2010, the company
estimates that its combined markets will be worth roughly $5
billion. Bubb and company don’t plan to do all the
recruiting themselves, however. That’s the reason why
Ambric chose Portland-based venture firms like OVP and
Northwest Technology Ventures. In addition to their tens of
millions of dollars, Bubbs says his VCs helped bring in key
hires, including the company’s head of operations and
software.
As Oregon’s old stalwart companies undertake needed
changes to stay relevant and stay in business, the
state’s business community will increasingly rely on
growing companies, such as Ambric and others, to build the
economic engines that will sustain Oregon’s future
prosperity.
Mark Druskoff is a
contributing writer for Oregon Business and researcher of
the Deal Watch chart.
Have an opinion? E-mail feedback@oregonbusiness.com
