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.
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