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.

Conference Panel: Portfolio Value Creation by Improving Business

Gary Loveman, Harrah's Entertainment, was asked about how he would act if slowing economic conditions impact business despite his assertion that economic conditions would not really impact his business.

He said he had the leeway to adjust his planned capital spending (approx. $4BN) to meet debt commitments.

It was interesting to note that he would rather kill/ delay Capex than sell assets to meet commitments.

I did a quick mental check of this insight against his assessment that growth in the industry came from M&A for assets, and that the WACC was currently pretty high within the firm. It fit.

Later, I asked a panel of General Partners (GPs) how frequently, in their substantial experience of dealmaking and investing, did the GPs have such contingency planning (operations risk management, really) conversations with the portfolio company senior management? Did such conversations impact the outcomes of their investments?

The response, as I am beginning to expect from superb panelists, provided insights into GP operations.

On a tangent, a panelist was of the opinion that folks like Gary Loveman operate at a different level. As the one who raised the question, I was inclined to agree. What an insight into talent- all from a simple question put to a CEO!

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist 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.