Private Equity

Preliminary numbers are in for 2009 private equity backed bankruptcies and not surprisingly the numbers are up significantly from 2008.  As reported by peHUB in 2008 there were 46 Chapter 11 filings for PE-backed firms, through November 30, 2009 there were 83.  This was a sharp increase in comparison to the two PE backed firms who went bankrupt in 2008.

My first exposure to private equity was in 2003 when I became an operating executive for a portfolio company of Golden Gate Capital and Cerberus Capital Management.  This was at the beginning of the private equity boom that lasted through 2008.  At that point in time it was inconceivable that a serious private equity backed firm would ever go bust.  It was also inconceivable that a portfolio company’s debt would ever trade at a discount.  Such events would be considered professional suicide – a bankruptcy or downgrade would seriously impinge a firm’s ability to raise debt or equity in the future.  In 2010 the world has changed and the stigma of bankruptcy simply is not what it once was.

As shown in the following table the pace of PE backed bankruptcies in 2009 significantly accelerated in the first half of 2009 and then tailed off dramatically:

The types of firms filing for Chapter 11 protection should be no surprise:

Morgan Stanley’s Mary Meeker, the “Queen of the Net”, is famous for her in-depth analyses of technology markets.  In 2009 Mary and her team have been heavily promoting Mobile Internet as the next big wave in the technology market.  Several copies of her 68 slide October “Economy & Internet Trends” presentation from the Web 2.0 Summit have circulated around the web.  Recently Morgan Stanley released the 671 slide presentation, the Mobile Internet Key Themes Report, that underlies Mary and her team’s research.  If you were ever looking for the definitive research primer on why Mobile Internet will be the most dominant theme of the technology market for the next 5 years look no further.  You can download the entire presentation via this link.  You can also view it below.

Here are several links to stories that I never got around to commenting on this year.  Enjoy:

Best and Worst Industries of Decade, or, Why Children’s Clothes Makers Need to Get Into VoIP.  Paul Kedrosky, Infectious Greed

Stealth Startups, Get Over Yourselves: Nobody Cares About Your Secrets.  Vivek Wadhwa, via TechCrunch

The Startup Visa And Why The Xenophobes Need To Go Back Into Their Caves.  Vivek Wadhwa, via TechCrunch

Rangel Puts Carried Interest Back On The Agenda.  Wall Street Journal Private Equity Beat

Memo to Congress.  There are legal issues with taxing carried interest as ordinary income.  Paul Koenig, peHub

15 Google-y Perks That Will Make You Jealous.  Nicholas Carlson, Silicon Valley Insider

Why Don’t Fortune 100 CEOs Care About Social Media?, JCM at SpataillyRelevant.org

Disney's four funnels.  Forget fairy dust. M&A in the Magic Kingdom is all about process.  Richard Morgan, TheDeal.com

Barack Obama Has Better Things to Do Than Tweet.  Ryan Tate, Valleywag

Sometimes Twitter Accounts About Sh*t Your Dad Says Get You TV Deals.  MG Seigler, TechCrunch

Things VCs Never Say . . .

The folks at ZL Technologies just can’t help themselves.  Earlier this year you may recall that ZL Technologies sued Gartner for over $1.6 billion in damages after being placed, for the fifth year in a row, in the Niche Quadrant of Gartner’s Email Archiving Magic Quadrant.  The Federal District Court for Northern California dismissed ZL’s lawsuit in early November.  In their original lawsuit, ZL raised seven claims, all of which were dismissed.  In an effort to quash further litigation, Gartner has asked the Court not to allow ZL to amend their original complaint.  On five of the seven claims the Court did that, but they left a small window open for ZL to take one more bite at the litigation apple.  On December 4^th ZL did just that by filing an amended complaint citing defamation and trade libel.  You can read the entire amended complaint here.  To avoid another dismissal, ZL will need to prove that Gartner’s statements were “made with actual malice, hatred, ill will, improper and malevolent purpose and with knowledge of falsity or with reckless disregard for the truth.”  For anyone who has read the actual Magic Quadrant report you’ll see how high a hill ZL will have to climb to prevail on their allegations. 

Perhaps ZL should consider suing in the UK where libel laws are different.  As the New York Times’ Sarah Lyall noted in her recent article ‘Britain, Long a Libel Mecca, Reviews Laws’:

In the past few weeks there have been several exits for private equity investors in the supply chain management space.  Using some baseball analogies, one could be categorized as a single, two would be considered doubles, and three are potential home runs, but no grand slams.  The companies that have achieved some type of exit in the past few weeks include Advant-e Corporation, GXS & Inovis, JDA & i2, Descartes, SPS Commerce, and RedPrairie. 

While most people consider supply chain management to be a mature and somewhat boring marketplace, the diversity of the types of exits that have occurred recently show how investors can obtain significant returns even in these tough times.  Generally, supply chain management companies are not considered to be too valuable in comparison to other software markets.  Take a look at the following table from the Software Equity Group’s 3Q 2009 Software Industry Equity Report.  Out of the 24 markets that SEG tracks, supply chain management is the 19^th most valuable market in terms of Enterprise Value/Revenue and EV/EBITDA multiples:

Advant-e $2 Million Dividend

Advant-e (Nasdaq:ADVC

Earlier this year, ZL Technologies sued Gartner for over $1.6 billion in damages over Gartner’s placement of ZL Technologies in the email archiving Magic Quadrant.  Recently, the Federal Court for the Northern District of California dismissed the case and handed Gartner a nice little victory.  The Court did not slam the door totally in ZL Technology’s face since they left them a slight bit of room to amend their complaint.  You can read the Court’s entire Order here.

The details and an assessment of the initial lawsuit were covered in an earlier post entitled “Suing Gartner Won’t Solve Your Magic Quadrant Problems.”  Basically, ZL Technologies got fed up of being binned in the ‘Niche’ quadrant year after year.  ZL Technologies has been in business for 10 years and included in the MQ since 2005.  After being pigeon-holed in the ‘Niche’ quadrant for the fifth year in a row, ZL Technologies decided that Gartner and their analyst Carolyn DiCenzo were so biased against them that their only recourse was to sue Gartner.  ZL made seven claims against Gartner in their original lawsuit.  These included defamation of character, false statements about Gartner’s products/services, and false statements about Symantec under the Lanham Act

It continues to be a tough market to sell technology products and services.  Recent Q3 earnings announcements help to reinforce that the recession is still impacting the top lines of technology companies.  Consider the following:

• IBM total Q3 revenues declined 6.9%
• SAP’s new license revenue declined 31% and total Q3 revenues declined 9%
• Oracle’s new license revenue was down 17%, and total revenues were down 5%
• Microsoft’s revenues declined 14%

If these tech heavy weights are having a hard time growing revenues it would not be too surprising if your company was struggling as well.  One of the most common complaints cited by sales teams and sales management is that prospects simply cannot appreciate the value a company’s offerings bring to the table and the significant economic benefits they could achieve if they simply implemented your solutions.  Often, the root cause of these problems is that product managers and product marketeers lack the financial literacy skills needed to express compelling value equations for their products and services.