Will pressures of stock market reporting push Silicon Fen aristocracy towards private equity?
Last week booming biotech Acambis (ACA.L) said it has decided to delist from NASDAQ because of the extra reporting obligations and related costs imposed under the Sarbanes-Oxley Act, the stringent US law that emerged from the debris of Enron and other financial scandals.
Earlier this year, IT security specialists nCipher (NCH.L) said they were ending the tyranny of quarterly reporting. They said in their June quarter report that due to the time consumed by quarterly reporting and the significant extra costs of preparing accounts under both US GAAP [accounting rules] and IFRS [a new set of international accounting rules], they would look into reporting half-yearly under IFRS alone.
The CEOs of many listed companies these days look back on the days of running a private company with nostalgia. It’s reportedly widespread in Silicon Valley, where according to a recent report in Business Week, executives are taking a keen interest in the private equity buy-out option, not so much with an eye on their pockets, but more because it will allow them to focus on long-term strategic decisions or cranking up R&D spending without spooking the stock market.
The magazine quotes a partner at a private equity fund saying “we’re setting them free from the 90-day management process,” though I find it hard to believe new owners would be quite as benevolent as that sound bite suggests.
Just last Friday, Freescale Semiconductor Inc, a mobile-phone chip maker that was spun off by Motorola, said it had agreed to be purchased by a private-equity consortium for $17.6 billion. Data processing giant SunGard Data Systems went private in a $11.4 billion deal last year and since then private equity has snared Serena Software and the semiconductor unit of Royal Philips Electronics.
Business Week reported that companies being considered as private equity buy out candidates include Sun Microsystems, NCR, Symantec and several ‘troubled’ telcos like Siemans, Nortel and Avaya, as a wave of private buy outs sweeps the US.
Slide rule filters
Investment bankers JPMorgan have developed three financial filters to identify potential buy outs, in addition to the usual strategic considerations like competition, regulation, management quality and stability. The three filters are: interest cover, gearing and valuation (calculated by dividing a company’s enterprise value by its EDITDA*).
There’s nothing daunting for private equity funds in Silicon Fen – the successful Cambridge Cluster of high tech firms. There are about 35 listed companies in the region and many of these are too early in their own development cycle to be of much interest to the private equity funds. But the more established firms, the Cluster’s aristocrats as it were, with stable earnings, the right financials and blue sky must be attractive.
One estimate is that the private equity funds will raise as much as $280 billion this year. Most of this will be spent in the US, but the funds won’t be put off by the price tag on, for instance, Silicon Fen’s two largest companies – Arm Holdings and CSR, both valued around £1.5 billion by their current share price.
There is another tier of solidly performing companies, including Autonomy, Aveva, Domino Printing and Xaar to name a few stars. Consider a company like the aforementioned nCipher, which reported 1H earnings last week. It has a strong presence with sophisticated technology in a growing and mission-critical (IT security is no passing fad) market. The company was disrupted earlier in the year by a takeover offer that was eventually blocked by the authorities on competition grounds (thereby confirming its market position) and has since refocussed on growing the business organically and by acquisition. It might welcome some time out of the stock market spotlight and be a nice little earner for private equity. They could then plan for a lucrative return to the stock exchange boards several years down the track.
It has been done before, of course. Silicon Valley’s Seagate Technology and Verifone have just had successful initial public offerings after going private at the start of the decade. Clearly private equity funds are tough taskmasters too, but most take a longer-term view than the stock market.
Neither will distance be a hindrance in this globalised world. New York’s famed KKR led a consortium that has stretched across the Pacific to approach one of Australia’s leading retail groups with a A$17 billion bid.
Cambridge is just across the pond. And most of its aristocrats have a decent profile in the US courtesy of operating successfully in North American markets.
John Tilston
18th September 2006
*EBITDA = earnings before interest, tax, depreciation and amortisation.
