DealMarket Digest_Issue 30

DIGEST

30

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 30

1 US Tech Sector Deals Down 1 Mega Buyouts With Big Returns 2 German PE Sentiment Dips PE Industry Optimistic Despite 2 Canada’s Turbulent Times 3 M&A Trends: The Groupon Effect 3 Global PE Activity Subdued 4 Private Equity Portfolios To Go 4 Quote of the Week • But Not Out, Says PwC

• Zephyr reports

• Record expected in secondary deals

• Frankness and fairness

December 01, 2011

PWC SAYS US TECH SECTOR DEALS DOWN, BUT NOT OUT With an eye on announced deals in the quarter, PwC is optimistic about the possibility that activity may increase. The actual numbers, both value and volume, are close to stagnation in the past three quarters and certainly down compared to last year’s numbers. But in its latest report, PwC says a number of very large deals executed by PE firms and by technology companies are indicative of a trend that it expects to continue as large tech companies are making acquisitions to expand market share and product lines.

Some deals highlighted in the report: • Google's $12.5 billion acquisition of Motorola Mobility • Hewlett-Packard acquired UK software provider Autonomy Corporation for $11.7 billion in cash.

• Broadcom announced the acquisition of NetLogic for $3.9 billion • Blackstone's acquired Emdeon in at $3 billion valuation • Providence Equity Partners' acquired tech companies Blackboard for $1.6 and SRA International Hellman & Friedman bought Sungard's Higher Education business for $1.8 billion to combine with existing portfolio company Datatel. .

MEGA BUYOUTS WITH BIG RETURNS The largest European buyouts generated “some of the best returns” in the last year, according to Reuters, pointing to PE firms that were writing up valuations by 22.4 percent in the 12 months to end June. Citing data from Thomson Reuters, all buyouts returned 15.3 percent in the 12 months to end June, outperforming benchmark European indexes.

The improvement in returns just might reduce the skepticism about mega deals done at the peak of the PE boom, those that have survived recession and are sustaining during turbulent markets. The article ends on a cautionary note that PE returns may not continue so strongly because the public market benchmarks have fallen again.

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GERMAN PE SENTIMENT DIPS In the latest issue of The German Private Equity Barometer took its steepest fall since the kfw started tracking dealmaking sentiment amongst the country’s PE practitioners in 2003. The economic recession potential and volatile debt markets are the cause. The authors of the report expressed the need for political and fiscal wisdom to prevail. The survey ended on a positive for both early and late stage deals, saying that respondents see opportunities to initiate deals as company valuations are dropping.

CANADA’S PE INDUSTRY OPTIMISTIC DESPITE TURBULENT TIMES As indicated above, Germany’s PE practitioners might be feeling a negative about prospects but their Canadian peers are more upbeat. According to a survey done by the CVCA, 80% of the say the participants in its private equity survey that over the coming few months, they will increase or be consistent with the investment pace of the past previous six months. Their investment focus will be on new investments over the next six months, according to 61% of the respondents, rather than investing in existing portfolio companies or follow-on transactions.

Key points revealed in survey • Private equity funds are liquid and have dry powder • Private equity funds seeking exits for mature assets • M&A is preferred exit, IPO market less so

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M&A TRENDS: THE GROUPON EFFECT Daily deal web businesses, those that offer consumers a time-limited promotional discount on goods and services provided by third parties, are driving M&A activity globally, according to a research note from Zephyr. Groupon’s flotation on Nasdaq is probably highest profile deal of this type, but M&A activity and positioning amongst its competitors has been strong. It began late last year with rumors that Yahoo! was looking to acquire Groupon, subsequently it came out that Google had made a USD 6 billion offer for Groupon.

The Google offer was rejected and the search giant turned its attentions to smaller daily deal companies. In the meantime, LivingSocial, raised USD 400 million expansion financing at a valuation speculated to be between USD 10 billion and USD 15 billion.

Other examples of the trend provided by Zephyr included, the Chinese daily deal site Lashou.com and kgbdeals. The Chinese venture filed for an IPO a few months ago, while in October kgbdeals said it would buy TheDealist. Also online discount retailer Gilt Groupe announced that it would purchase assets from BuyWithMe. Groupon’s M&A activity is also strong, as it buys local competition in locations abroad, in Latvia, India and Indonesia for example. The report said that rounds of funding are targeting Australia’s CatchOfTheDay, the owner of Indian group buying site Snapdeal, Canadian portal Dealfind.com and Groupalia Compra Colectiva of Spain.

The report ends on a note of caution. While the “variety of transactions and their geographical scope in 2011 seem to demonstrate an insatiable appetite” for daily deal companies, there are signs its popularity could be on the wane. For example, Facebook decided not to proceed with a deal service after a trial (see InsideFacebook for more details), while Groupon has had issues with retailers and customers.

GLOBAL PE ACTIVITY SUBDUED Zephyr's latest report on PE activity says October was among the weakest results of the last 12 months, both in terms of volume and value, indicating that the private equity market remains subdued. While the value of global private equity investments jumped 50 per cent month-onmonth in October it experienced a 15 per cent decline in volume. The result points to improved target company valuations in October, and there were several blockbuster deals to support this, says Zephyr But October’s result was quite a bit lower than one year ago – when there were 303 private equity deals worth a combined USD 33 million.

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PRIVATE EQUITY PORTFOLIOS TO GO We spied three separate newswire reports this week that suggest there will be a steady flow of secondary activity in the coming months. On the buy side, AXA is still looking for PE portfolios and will complete some deals by year end, according to Reuters. And on the sell side, FT reports that BNP is considering the sale of its USD 700m PE portfolio private equity portfolio, in a report that was unconfirmed by the French bank. Also in the works is a sale by Germany’s WestLB of a USD500 million portfolio. According to Reuters, the transaction volume for secondaries has more than doubled in 2010 and is on track to reach to hit a record of USD 25 billion this year, based on research conducted by UBS. Other transactions mentioned include Barclays sale of USD 740 million portfolio of PE assets, Citigroup’s USD1.7 billion package of fund interests and the sale of Germany’s HSH Nordbank’s EUR 620 million portfolio. The buyers included investors such as the aforementioned Axa Private Equity, Coller Capital, Partners Group, HarbourVest and Lexington, all of which are either raising multibillion-dollar funds or have already done so, according to the FT. The trend is expected to continue with impetus from S pension funds and endowments that are looking to sell as a portfolio management strategy.

QUOTE OF THE WEEK

“We prefer brutal honesty to hypocritical politeness.”

Who said it: Vinod Khosla, Khosla Ventures Context: In an interview at a recent tech industry conference, Khosla told the audience that he’s had the brutal honesty quote on his website since he started his VC firm in 2004. It is a principle for him because he’s seen too many entrepreneurs “waste years of their lives” because people were too polite. “I promised I’d never give anybody polite advice when I thought I could help them by being critical. Even after I’ve passed on an investment, I’ll often call them up and say, here’s the reasons,” he said. Image source: TiEcon Where we found it : Xconomy

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The Dealmarket Digest empowers members of Dealmarket by providing up-to-date and high-quality content. Each week our in-house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global.

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Editor: Valerie Thompson, Zurich

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