A case discussion link below would give you background perspective on this post { Private Equity Case: Dialogic Carve Out from Intel}:
http://randomjunkyramblings.blogspot.com/2009/02/private-equity-case-dialogic-carve-out.html
Synergies
I checked with a technology industry focused private equity investor on whether his investment committee considers synergies across its operational portfolio in its investment decision making. After all, technology is a pretty broad term- do they see an advantage in narrowing their focus?
His rejection of the idea was couched in an excellent example. The investment team would not buy competitors. This was a pretty straight forward discounting of the potential of merger efficiencies, and we can list numerous reasons for it- from strategic ones like the hypercompetitive nature of the technology industry, to investment ones like the heightened risk of a larger company’s underperformance weighing down upon the rest of the portfolio.
Microeconomics
However, this should remind you, as it reminded me, of microeconomics. Does rejecting competitors also mean you would reject complements? Strictly as an investment strategy, wouldn’t investing in complements also increase the correlation across investments?
Investment examples in the technology industry would be:
1. Investing in Facebook and Fun Wall, or investing in Twitter and Twitterdeck.
2. Investing in the Transmeta Crusoe process and a windows power management utility for that processor
Would this mean that the investing team needs to have processes in place to monitor revenue correlations across portfolio companies?
The Venture Capital Context
Lets look at this in the venture capital context, discussed in my post here: {Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?}
http://randomjunkyramblings.blogspot.com/2009/02/panel-venture-capital-if-it-aint-broke.html
Investing in startups, especially the very early stage ones, needs to account for some strategy shift. However, sometimes even late stage startups may need to adjust their strategy to account for monetization opportunities in tough economic times.
How would the venture capital firm react if this strategy shift made this investment a complement of anther portfolio investment?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Showing posts with label Intel. Show all posts
Showing posts with label Intel. Show all posts
Sunday, May 31, 2009
Sunday, February 01, 2009
Private Equity Case: Dialogic Carve Out from Intel
Given my own experience with a Citigroup company that underwent a carve-out and an acquisition, I was looking forward to insights from this panel of heavyweights.
The Investment Rationale, Diligence and Terms
The comprehensive discussion started off by covering the rationale for a carve-out. One could be the impact of the technology inflexion curve, which forces revenue contraction. The challenges lie in the due diligence- the new entity requires an operating infrastructure to be built around the business- and venture capital like agreements on the term sheet conditions around downside protection- like redemption rights. Factors like restructuring management also need to be considered as they impact investment risk. In the Intel- Dialogic deal, intellectual property discussions were also critical.
Exit Strategy
Given this context, the exit strategy pitch to the investment committee is also critical. The right expectations need to be set, from whom to sell to- IPO vs. general sale- to sale value. This is especially important when the investor would like flexibility on freeing up cash if necessary.
This raises interesting investing questions:
1> Investment Failure Rates
There are various ways to slice and dice the investment portfolio: have firms considered “failure” rates of different types of deals, e.g. a carve out vs. a public company acquisition, as a factor in their decision making?
2> Portfolio Synergies
Do investment committees consider synergies across their investment portfolio as a factor in deal making? If so, what kind of policy should govern such a process? Note: Dealmakers sometime tend to think of synergy as finding efficiencies by acquiring competitors and consolidating market share. There is more to synergies- it pays to think like an investment professional here.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
The Investment Rationale, Diligence and Terms
The comprehensive discussion started off by covering the rationale for a carve-out. One could be the impact of the technology inflexion curve, which forces revenue contraction. The challenges lie in the due diligence- the new entity requires an operating infrastructure to be built around the business- and venture capital like agreements on the term sheet conditions around downside protection- like redemption rights. Factors like restructuring management also need to be considered as they impact investment risk. In the Intel- Dialogic deal, intellectual property discussions were also critical.
Exit Strategy
Given this context, the exit strategy pitch to the investment committee is also critical. The right expectations need to be set, from whom to sell to- IPO vs. general sale- to sale value. This is especially important when the investor would like flexibility on freeing up cash if necessary.
This raises interesting investing questions:
1> Investment Failure Rates
There are various ways to slice and dice the investment portfolio: have firms considered “failure” rates of different types of deals, e.g. a carve out vs. a public company acquisition, as a factor in their decision making?
2> Portfolio Synergies
Do investment committees consider synergies across their investment portfolio as a factor in deal making? If so, what kind of policy should govern such a process? Note: Dealmakers sometime tend to think of synergy as finding efficiencies by acquiring competitors and consolidating market share. There is more to synergies- it pays to think like an investment professional here.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
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