Friday, May 23, 2008

VCs find buyouts increasingly handy deal strategy

By Christopher Calnan

Despite a sharp decrease nationwide in overall leveraged buyout activity sparked by the credit crisis, local private equity firms have expanded their midmarket buyouts of technology companies in an effort to reduce the risk of continued investing.

Lenders may be more conservative, but they are still distributing the capital to buyout firms capable of identifying growth-stage companies such as those operating in the technology sector, industry insiders say.

Last week, for example, the 3M Co. reported reaching an agreement to sell Minnesota-based HighJump Software to Battery Ventures, which operates offices in Waltham. Battery didn’t disclose the deal’s value but said HighJump generates annual revenue of $90 million.

“It’s a new situation,” Battery senior associate Jesse Feldman said. “Tech, as a sector, has held up really well.”

The buyout climate is being driven by the combination of firms expanding beyond traditional investments such as manufacturing, and investors becoming more expert at technology deals, said Josh Lerner, an investment banking and entrepreneurial management professor at Harvard Business School.

Twenty-six percent (four of 15) of first-quarter LBOs completed by New England firms involved tech companies — up from 10 percent (two of 19) during first-quarter 2007, according to Thomson Reuters Corp.

Buyouts typically offer investors less risk but lower multiples upon the sale of the acquired company, which is often a more-established business than a VC’s traditional portfolio company. HighJump Software, for example, was founded in 1983 as Data Collection Systems and was acquired by 3M in 2004.

Also last week, Boston-based M/C Venture Partners was part of a syndicate of firms that bought GTS Central Europe, a telecommunications service operator that generates $620 million in annual revenue.

M/C Venture Partners targets buyout deals that require the firm to invest between $10 million to $50 million, partner Robert Savignol said. The firm has still been able to attract loans to complete the deals during the credit crunch, but the terms are much more conservative than a year ago and don’t favor high return rates, he said.

Battery’s buyout deals range from a few million dollars to $300 million, Feldman said. Last year, it took Colorado-based software maker Quovadx Inc. private in a deal worth $136.7 million. The 25-year-old Battery Ventures, which also invests venture capital in startups, typically completes two or three tech-company buyouts each year to balance out its portfolio with various risk-reward ratios, Feldman said.