M&As in India Inc

George Cherian

12/27/2000
The Economic Times
Copyright (C) 2000 The Economic Times; Source: World Reporter (TM)

THE M&A engine in India is humming with activity, and its getting pretty loud too. The last calendar year
saw a spate of big ticket deals, but the action in 2000 was far heavier.
Of course, deals are taking far longer to close, but that's only natural. You wouldn't sell your old car if it
didn't fetch you the right price, would you? Unless, of course, youve got bills to pay.
Those that had bills to pay have already sold. Those that dont, are playing the waiting game. They'll sell
alright. But in their own time, on their own terms.
As for the deals, that happened during the year, there were three that would go down in the history of
investment banking in India as path-breaking. And investment bankers have been unanimous in their
choice, which, in turn, has made M&Bs Investment Bankers Best Deals of 2000 a rather easy exercise.
In February this year, Tata Tea acquired Tetley in a 271 million pounds leveraged buyout. The deal,
which was not only the largest ever Indian M&A transaction (Rs 1,870 crore), was also a trendsetter of
sorts given that it was the first LBO done by an Indian company for acquiring a foreign company.
Though there was some difficulty faced in selling down the senior debt facilities of 165-m pounds that was
raised for the acquisition, the profile of the deal was a winner without compare. Arthur Andersen and
Rabobank worked on the transaction.
Less than a month later, AV Birla group company, Hindalco, bought over arch-rival Indian Aluminium in a
Rs 1,008 crore all-cash deal, making it the largest all-cash transaction in the history of corporate India.
The deal is a strategic fit for Hindalco.
For one, Hindalco faces a shortage of alumina in which Indal is surplus. However, Indal is short of the
finished metal, in which Hindalco has a strong presence.
In addition, Indal has large capacities in finished, value-added products - such as foils, extrusions and
rolled metal which can provide Hindalco with a cushion. DSP Merrill Lynch was sole advisor to Hindalco,
while J M Morgan Stanley represented Alcan.
A couple of months later, in May, the KK Birla group gave the Italcementi group a 50 per cent stake in
Zuari, their cement division, for a consideration of Rs 370 crore.
The cement division, which was spun off into a separate company - Zuari Cement - was valued at Rs 740
crore. The novelty of the transaction lay in the fact that it was structured as joint venture, the first one of
its kind in the cements business.
Also, Zuari Cements' 1.7 million tonnes capacity was valued at a whopping $96 per tonne at a time when
the capacities of most other cement manufacturers were being valued at $80 to $85 per tonne. The K K
Birla group was advised by Bank of America, while Lazard India advised the Italcementi Group.
The year closed (well almost) with the ICICI Bank -- Bank of Madura deal. The new private bank took over
the old in an all-cash deal to create the largest private bank in the country. The ICICI subsidiary was
desperate to grow and completed the deal in about two weeks.
DSP Merrill Lynch was the advisor for Bank of Madura, while Kotak Mahindra Capital Company
negotiated on behalf of ICICI Bank. Given the price -- two shares of ICICI Bank for every share of Bank of
Madura -- analysts and deal makers are somewhat divided on whether to club it with the best deals.
Some said ICICI Bank had to pay too stiff a price, while others felt that the southern bank with its low
NPAs, was of the best takeover targets and the deal definitely makes sense.
Now, if you thought calendar year 2000 was a good year for the M&A business, you had better watch out
next year. For one, the roping in of a partner for Larsen & Toubro's cement division, which upon
completion, is going to be the largest ever M&A transaction for a long time to come.
There's also going to be the governments disinvestment programme, which despite a shaky start, is
finally moving.
Here's what investment bankers have to say about the year 2001: most of the action is going to be in the
cement, telecom, banking and technology sectors which are going to see further consolidation.
The governments privatisation programme is also going to see a number of deals close during the first
half of the next calendar year.
Hemendra Kothari

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 Chairman, DSP Merrill Lynch:
I would rate Hindalcos acquisition of a 74 per cent stake in Indian Aluminium Company which was
majority controlled by Alcan of Canada, as one of our best deals in 2000.
This was the largest all-cash acquisition by any Indian company to date. The transaction has strongly
positioned Hindalco to take on global competition in an increasingly consolidating international aluminium
industry.
Among our equity deals, the strategic sale of a 26 per cent stake in Hathaway Cable & Datacom to Star
TV, was a significant transaction because it was not only done in the midst of significant volatility in public
markets but because it was a good match between complementary entities.
The deal represented one of the largest investments made by the Star TV group in India.
Among debt deals, the Indian Oil Corporation deal was among the more notable ones in terms of right
pricing. DSP Merrill Lynch was the lead arranger in the Rs 760 crore issue of debt by IOC in February
2000.
While the book-building coupon range was 10.85-11.35 per cent, the cut-off coupon rate decided by the
process of book-building stood at 10.85 per cent that was the lower end of the band.
The cut-off coupon rate of 10.85 per cent was not only the lowest interest rate in the last five years for
similar maturity taxable, non-priority sector corporate debentures, but this instrument also had the lowest
spread over similar tenor government securities.
Munesh Khanna
Head (corporate finance),
Arthur Andersen:
Our most significant M&A transaction this year was the one we did for Sterlite Industries. Arthur Andersen
represented Sterlite as their sole advisors in the business and financial restructuring exercise which was
completed in June 2000.
With the objective of unlocking the hidden shareholder value and leveraging the strengths in each line of
these diversified businesses within Sterlite Industries, Arthur Andersen recommended the demerger of
the telecom equipment business.
On the equity side, Tata Teas acquisition of Tetley in March 2000 for $430-mn was Arthur Andersens
best deal. Arthur Andersen played a pivotal and singular role in the deal origination and deal structuring
which successfully resulted in a 100 per cent transfer of ownership of Tetley to Tata Tea through a
leveraged transaction without any significant exposure of Tata Tea and without any immediate equity
dilution.
In debt, Arthur Andersen advised Arvind Mills on the divestiture of a portion of its stake in the branded
garments business in February 2000.
After creating an independent vehicle for the potentially high-growth branded business of the company,
we arranged a Rs 100 crore funding in the new vehicle by ICICI Group through optionally convertible
debentures which would be converted into equity only if the company manages to meet its revenue and
earning projections over the next few years.
Vishwavir Ahuja
Managing director, Bank of America:
Our best M&A deal was the sale of a 50 per cent stake in Zuari Industries 1.7 mt cement business by the
K K Birla group to Ciments Francais, where BankAm acted as financial advisor to Zuari.
The valuation of Zuaris cement business was agreed at Rs 740 crore, one of the highest equivalent
price/tonne to be negotiated in Indian cement industry acquisitions. The cement plant was priced at $96
per tonne.
In equity raising, one of our best deals was for Wipro where we acted as co-arrangers for the companys
$135-m issue of American depository shares in October.
Among debt deals, our best deal was the refinancing of a $130-m term loan facility for Reliance
Petroleum, where we managed to bring down the coupon on the borrowing significantly.
P Krishnamurthy
Vice-chairman, JM Morgan Stanley:
In my opinion, Alcan Aluminiums divestment of its 54.62 per cent stake in Indal in favour of Hindalco,
would qualify as the best M&A deal we did. This was the largest all-cash (Rs 1,008 crore) deal in the
metal sector in India.

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 The best domestic equity raising programme done by us this year was for Aztec, which was placed in a
very volatile market and finally the book closed on an over-subscription at the end of a week that
witnessed a continuous downfall of the markets.
Our landmark debt raising deal was the Rs 733.6 crore seven-year issue of IOC with put/call option after
five years. It was a fast executed deal and at 10.85 per cent, was the lowest for all AAA corporate issues
during the year.
Shanti Ekambaram
Executive director, Kotak Mahindra Capital Company:
KMCCs best M&A deal was Lafarges Rs 785 crore acquisition of Raymonds cement division. The
acquisition helped Lafarge double its existing cement capacity form 2.25 million tones per annum to 4.50
million tones per annum, and took Lafarge to a position of strength in eastern India.
Lafarge now has market shares of 33 per cent and 29 per cent in the key markets of Bihar and West
Bengal and is well poised for further inorganic growth in other parts of the country.
In equity, our best deal was Hughes Tele.coms Rs 750 crore book built IPO made during August 2000. It
was the first 'pure equity' infrastructure issue in India, the first public issue of a telecom services company
in India and generated demand in excess of Rs 1,000 crore.
Rana Kapoor
MD, Rabo India Finance:
In terms of M&As, Rabos best deal during calendar year 2000 was undoubtedly the 270-m pounds Tata-
Tetley deal which was a trend-setter given that it was the first leveraged buy-out by any Indian company.
Among our debt deals too, we would rank the Tata-Tetley deal among our best which involved the
syndication of 165-m pounds of senior debt facilities.
This consisted of an amortising term loan of 110-m pounds, a term loan of 25-m pounds, a capital
expenditure loan of 10-m pounds and a revolving credit facility of 20-m pounds.
Among our equity deals, we would rank the private placement of equity done for Morepen Laboratories
among our best.
The deal involved privately placing 25 lakh equity shares with institutional investors at a price of Rs 650
per share. The shares were subscribed to by financial institutions and mutual funds.
Pramit Jhaveri
Managing director (investment banking), Salomon Smith Barney:
In M&As, our best deal was the merger between Global Telesystems and Global E-Commerce. This
merger, stated to be the largest in Indian markets, led to the creation of a company with a combined
market capitalisation of some $1.7-bn at current market prices.
In equity deals, our best deal was Silverline Technologies $110-m issue of American Depository Receipts
in June. In the process, Silverline became the first technology company to get listed on the NYSE.
This was also, at the time, the largest international offering from an Indian IT services company. The
offering was oversubscribed and completed in volatile and illiquid markets as concerns over the direction
of US interest rates dominated investor sentiment at that time.
Udayan Bose
Chairman, Lazard India
Among the best M&A deals we did during calendar year 2000 was the Italcementi groups acquisition of a
50 per cent stake in Zuari Cement, the deal size being Rs 740 crore.
Other significant M&A deals done by Lazard during the year included Hutchison Whampoas acquisition of
a substantial stake in Gujarat Fascel Telecom and also Schneider Electrics acquisition of the low tension
gear business of Crompton Greaves.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

MARKET WEEK -- Foreign Investment

Asian Trader
Market Hangs Up on Asian Telecoms' Rumored Plans
By Leslie P. Norton

11/27/2000
Barron's
MW9

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 (Copyright (c) 2000, Dow Jones & Company, Inc.)

Investors' appetite for Asian communications stocks vanished last week on reports that a rejiggering in
charges for Chinese mobile services would slash revenues for China Mobile and China Unicom, and on
suggestions that NTT DoCoMo will buy up to 20% of AT&T Wireless for $9 billion. DoCoMo and China
Mobile are the largest telecom stocks in Asia.
China Mobile shares slid 16.6% to HK$42.10, and the company's American depositary receipts fell to 27-
and-change, as analysts slashed price targets to as low as HK$45 and raised questions about the
company's ability to grow faster than expectations.
China Unicom cratered 19.5%, to HK$12.60, and its ADRs fell to 16.75. The plunge occurred only days
after China Mobile sold $7 billion of new stock and convertible bonds to pay $32.8 billion for the assets of
seven Chinese mobile-phone companies. Meanwhile DoCoMo slid 12%, to 2.63 million yen. And Jupiter
Telecommunications, Japan's largest cable operator, pulled an initial public offering in Tokyo and on the
Nasdaq, that was to have valued the company at $2.1 billion.
According to Chinese press reports, China will switch to a "calling party pays" system for mobile-to-mobile
calls, with no charge to the receiving party, and implement a reduced rate for mobile callers dialing up
fixed lines. Officially, China says the proposals remain under consideration. But the loss of revenues from
mobile users receiving calls could be dramatic. Bear Stearns analyst Derek Chan in Hong Kong figures
that under the new plan, mobile customers may spend less on cellular services and use prepaid calling
plans.
Sure, lower rates might encourage people to use their services more. But even before last week's
developments, Chan had lowered his rating on China Mobile, fretting that its record of beating investor
expectations was poised to end amid greater competition and slowing Chinese growth.
The scenario under discussion seems an unlikely one, mainly because there is no offsetting gain in fees
paid by China Telecom, the fixed-line provider, for connecting calls to mobile subscribers. Some
speculate that China may be loath to saddle China Telecom with such fees before the widely expected
China Telecom IPO next year. Yet any smart investor would surely insist on knowing about such potential
fees. Without these fees, the outlook for China Mobile and Unicom is unambiguously negative.
At a price target of HK$45, China Mobile is dead money for the next 12 months. And the stock may yet go
lower, given that it's still widely held by global investors. Consider that Janus Capital still owned 2.05% of
the company, or 76.4 billion shares, at the end of September.
Meanwhile, DoCoMo has been acquiring minority stakes in various wireless operators around the world,
and is reported to be close to taking 20% of AT&T Wireless. DoCoMo has been looking for a U.S.
company with a TDMA network that it can upgrade. The other candidate for such an investment was
Cingular, the joint venture of SBC and BellSouth.
Last week Stephen Parlett, who steers the $360 million Montgomery Global Communications mutual
fund, threw up his hands in disgust. With DoCoMo, "It's a lot of money to lay out right now and capital's
not cheap," he says. "The $9 billion hits you in the face. People will focus on that, before they focus on
long-term strategic benefits."
Parlett bought into the recent China Mobile offering, and finds it difficult to believe that China won't add
interconnect fees if it introduces a calling-party-pays policy. "There's not an example in the world where
interconnects happen for free," he says. "If it were to happen in this case, the market cap should just be
slashed. But that's not realistic."
Parlett remains a fan of China Mobile's strong organic growth; business users, moreover, are insensitive
to cost. Still, he acknowledges, while last week's slide puts the stock "closer to fair value," it still isn't
cheap.
"My hesitancy on the name has been something like this coming out of the government, and management
is not always in control of its destiny," Parlett says. That's a good lesson to keep in mind for anyone
contemplating a China investment.
-- The yen and Japanese stocks slid last week, after Japan's prime minister, Yoshiro Mori, survived a no-
confidence vote led by Koichi Kato, a reformer within the country's ruling Liberal Democratic Party. Kato
and other dissidents abstained. Debt woes at grocer Daiei and contractor Mitsui Construction also raised
fears that Japan's economy may take another hit.
Milton Ezrati, the senior economic strategist at Lord Abbett Investment Management, advises Fuji Asset
Management on asset allocation and is the author of Kawari: How Japan's Economic and Cultural
Transformation Will Alter the Balance of Power Among Nations (Perseus Books, 1999).

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 Last week's drama may be good news for bondholders worried about Japan's stretched finances, since it
suggests more delays in passing pump-priming measures. But it gives Ezrati no reason to turn bullish on
Japanese equities. "Unless the equity market can bank on the outcome of a reform-friendly agenda, the
vote is clearly negative," he says. "It is bearish for the yen for the same reason the equity market doesn't
like it. It means a continuation of the Bank of Japan's low-rate policy of desperately trying to sustain a sick
economy."
Ezrati won't take a truly bullish view until he sees greater signs of "necessary adjustments and reforms",
such as tax cuts, banks writing down nonperforming loans, and serious attempts to restructure the fiscal
side. It's a big job and he doesn't expect changes to happen anytime soon. Meanwhile, with 35% of
Japan's earnings coming from the electronics, auto and machinery sectors, the slowing global economy
bodes ill for corporate profits. Dresdner Kleinwort Benson sees "singledigit" profit growth for Japan next
year, but thinks that target will be negative if the U.S. grows less than the 3.5% forecast for 2001.
-- Just what is going on with the Singapore Fund? Over the past year, the NYSE-listed closed-end has
had three managers, the newest of whom, Roy Phua, came on board in October. It's an item that the fund
hasn't yet disclosed to shareholders.
So far this year, the fund is down 32.4%, versus a 20% decline for the benchmark Straits Times Index.
This quarter, it's down 1.9%, versus a 0.6% gain for the STI, despite the current rage for "safe-haven"
Singapore, which is one of the few Asian countries in Morgan Stanley Capital International's widely
followed Europe, Far East and Australasia index. The fund traded last week at $6.13, a 22.4% discount to
net asset value, and a far cry from its 1990 IPO price of $12.
It wasn't always thus. The changes partly reflect an ongoing overhaul at DBS Asset Management, the
fund's adviser and a unit of DBS Holding, parent of Development Bank of Singapore. Under the fund's
long-term manager, S. Hock Tan, the fund performed decently over the long haul. Tan left DBS early this
year to start his own Singapore money-management shop, Aegis Investment Advisors. Stella Ng, who
joined the firm from Murray Johnstone and was then named to run the fund, left last month for another
investment manager. Phua joined after a five-year career managing Asian assets for Rothschild Asset
Management.
Part of the underperformance also stems from restrictions on the fund, which can't own DBS Holding, the
largest stock in the Singapore benchmarks. Nor can it buy IPOs or conduct related-party transactions with
DBS.
Judy Runrun Tu, the fund's secretary, blames the fund's underperformance on a bigger-than-usual high-
tech bet early this year. Tu points out that it's still "too early" to judge the fund's performance, given the
short tenure of the new manager. Oh, and by the way, they plan to disclose the latest management
change in the next annual report.
Given these restrictions, its small size, and the discount, the fund might seem ripe for an attack by closed-
end activists. Yet so far, it's escaped that fate because the shares aren't widely held by institutions. That's
the theory of Jim Mallory, who oversees a $1.25 billion portfolio dedicated to closed-end funds at
Tattersall Advisory, a unit of First Union. With 7.4% of the fund, Mallory is its largest holder. He remains
sanguine about Singapore, saying it's "still a shining star in a dull universe."
--- Emerging Markets

In U.S. Dollars Index*

Index % Chg. 11/23 2000 Range

Argentina -3.1 1247.9 2052.2-1142.9

Brazil Free -0.9 718.8 945.1- 689.8
Chile -1.1 610.6 814.2- 570.0
China Free** -9.1 24.1 35.8- 24.1
Colombia** 1.0 44.5 81.3- 44.0
Czech Rep.*** -5.7 65.5 114.2- 65.5
Egypt*** -7.1 142.4 285.7- 117.1
Greece -7.6 415.0 879.4- 415.0
Hungary*** -7.6 195.7 399.4- 195.7
India** -1.1 111.1 229.0- 102.7
Indonesia 6.0 88.8 220.4- 82.0

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 Israel** -10.4 175.8 236.2- 150.5
Jordan -0.4 56.0 71.7- 54.4
Korea -12.4 83.6 171.9- 83.6
Mexico -2.0 1297.2 1771.3-1179.3
Morocco*** -3.0 163.3 223.4- 161.7
Pakistan** -4.6 41.6 74.9- 40.8
Peru** 3.3 121.7 216.0- 117.9
Philippines 0.0 136.9 251.5- 117.8
Poland** 1.7 407.4 676.2- 356.8
Russia*** -8.0 179.8 287.2- 179.8
So. Africa -6.4 141.0 220.2- 141.0
Sri Lanka** -8.4 38.2 63.9- 38.2
Taiwan -8.7 206.3 423.2- 198.0
Thailand -1.8 60.3 127.4- 51.6
Turkey -15.3 281.3 576.4- 265.8
Venezuela** -3.7 99.5 134.5- 99.5

*Base: Jan 1, 1988 = 100. Adjusted for foreign exchange fluctuations

relative to the U.S. $.
**Base: Jan. 1, 1993 = 100.
***Base: Jan. 2, 1995 = 100.

Source: Morgan Stanley Capital International Perspective, Geneva.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

India: A mania with meaning

03/28/1999
Business Line (The Hindu)
Copyright 1999: Business Line. All Rights Reserved.

A. Srikanth
WHAT are the key drivers of the unprecedented merger and acquisition (M&A) activity globally? One is no
doubt the extent of over-capacity in almost all industrial segments, across all regions. Excess capacity
increases competition, drives down profits and reduces growth.
Instinctively, companies adopt the easiest way to insulate themselves from competition-induced
pressures. As neither governments nor consumers allow companies to insulate themselves through
cartels, they have been taking the M&A route to achieve earnings growth and competitiveness. M&A,
which earlier used to be about conglomerates, is now about concentration. But where does the capital
come from? A strong equity market has often provided the funds for large-scale mergers. Most merger
deals were settled through stock transactions rather than cash. This is contrary to what happened during
the previous merger wave, in 1988. The higher the proportion of stock transactions, the more difficult it is
to justify acquisition costs.
There are other causes for the merger mania. European and Asian markets have become more receptive
to M&A activity. On the one hand, the European countries face competitive pressures from the creation of
a single currency. On the other, the Asian crisis has forced most Asian nations to look to the West for
technological and capital support.
Competitive forces have also led to privatisation and deregulation in many industries across the world,
especially in the US and Europe. Particularly in power and telecommunications. The market reaction has
been positive to such strategic restructuring exercises as they improve operational efficiency and result in
better resource allocation. Most important has been the technological revolution. Just as the revolution in
natural resources technology led to the drastic fall in commodity prices, the technology revolution has
reduced the relative prices of products, improving the terms of trade and lowering production costs.

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 Suddenly, economies of scale and scope have become important. At one point, there was a 'maximum'
size for businesses. But the technological revolution has transformed that to a minimum size. The
features of new technology provide tremendous scope for cost-saving.
A variety of strategic imperatives has been driving companies toward mergers and acquisitions. They
include globalisation, consolidation, product-differentiation and customer demands, vertical integration,
deregulation, technology requirements and re-fashioning.
***
Globalisation
The merger of Daimler-Benz and Chrysler is a good example of globalisation. There is an over-capacity of
around 30 per cent in the global car industry, which will soon produce 23 million more cars than it can
sell. The merger will help the functional Chrysler cars to enter the European market, and the prestigious
Daimler-Benz vehicles to cruise into the American market.
Moreover, Chrysler will have access to the wide European and Asian network of Daimler-Benz. The
German car company, on its part, can access the logistics and service support of Chrysler. With prices
falling faster than productivity gains, volume producers in Europe could face a yawing gap of $18 billions
between revenues and costs by 2000. So, a merger to globalise operations makes sense.
Consolidation
The acquisition of Bankers Trust by Deutsche Bank; of Courtalds by Akzo Nobel; and the oil mergers of
British Petroleum and Amoco; Exxon and Mobil; Total and Petrofina are major consolidation moves. The
aim is to exploit economies of scale by attaining critical mass and achieving cost-savings. Research has
also shown that return on capital goes up as the concentration index rises. This has been proved
especially in the cases of the pulping industry, air-compressors and pharmaceuticals. For the bleeding
Deutsche Bank, consolidation of its investment banking activity was essential. The margins on corporate
loans and retail banking are wafer-thin, making it imperative to consolidate the investment banking
business, which is relatively better-paying.
Dim growth prospects of just 1.5-2 per cent per year, and thinning margins in the $17-billion US paints
market have forced companies into a slugfest for market share. The European paints market has been
witnessing more activity, with around 270 acquisitions in 1998. While there is a slowdown in the demand
for architectural paints - growing at 1 per cent a year, margins are squeezed by pressure from paint
retailers and rising pigment prices. This has forced paint companies to go hunting for market-share,
especially in an industry turning mesoeconomic.
As a result of consolidation and the smaller number of producers, the importance of dominant players is
increasing. Before the purchase of Courtalds, Akzo Nobel had made four other acquisitions. The
acquisitions have increased Akzo Nobel's market share from 17.50 per cent to 22.50 per cent.
While one reason for the oil-major mergers is to create big firms considering the bleak future facing the
industry, the rationale is cost-cutting. For instance, the Exxon- Mobil merger is expected to result in a
saving of $4 billions. The oil price collapse, which has been squeezing the companies' margins, is just
one excellent reason to cut costs. More pressure came from shareholders. With returns on lower than the
cost, shareholder value has been destroyed.
The best way to improve return on capital is to expand outside the mature markets of North America and
Europe, where competition is intense. Companies such as Shell and Exxon, with international presence,
have clearly outperformed those with just domestic focus. This indicates that size is becoming
increasingly important, especially when it takes a lot of capital and a matching appetite for risk to
undertake projects in remote areas.
Yet another reason for the merger mania has been the low oil-share prices. It is now cheaper to buy oil
reserves on Wall Street than to drill. When the dollar equivalent per barrel of finding oil is close to $6, it is
available on Wall Street for $5.50 (market cap+net debt/total reserves).
Customer demands
The Grand Metropolitan and Guinness merger to create Diageo was to increase the number of product
offerings. In an industry where there are no 'must-stock' spirit brands, including a number of in-demand
products is the key to greater profitability.
The more such products, the greater the ability to fight retailers with the power to either make or break a
brand. Companies can use this consumer pull to negotiate better deals with fewer retailers. Diageo now
has 18 of the top 100 wine and spirits brands.
The AT&T-TCI and the Time Warner-Turner mergers are good instances of vertical integration. The
deregulation of the telecom industry has resulted in various combinations among the long-distance

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 carriers and local distributors. The earlier US Telecommunication Act prohibited encroachment into one
another's territory, but deregulation has changed all that.
Entry into either segment is costly, unless done through a merger process. Though each player has been
guarding its own turf, competition has forced mergers of all permutations and combinations. Thus, there
were mergers between two long- distance carriers (WorldCom-MCI), those between long-distance
carriers and local distributors (SBC-Ameritech and Bell Atlantic and GTE) and, finally, between two local
distributors. The AT&T-TCI merger is slightly different. Shunned by local distributors, AT&T acquired
cable operator TCI to link its long-distance carrier lines to individual homes and businesses. It can now
have access to homes and business establishments without the aid of local distributors. The merger of
American Electric Power and Central and Southwest is the outcome of deregulation in the electricity
industry and the urge to cross regional barriers. Similarly, combining the production unit of Time Warner
with the distribution network of Turner Broadcasting could create vertical integration.
Technology
The inability to keep pace with technology or to graduate to a higher level of technology was the reasons
for the merger of Digital and Compaq, and IBM and Lotus Corporation earlier. Compaq's hold in the
lower-end products segment and Digital's strengths in mini-computers were brought together by the
merger.
Similarly, with the 123 spread-sheets getting outsmarted by Microsoft's Excel, Lotus required a higher
technology platform for its Smartsuit programme to succeed. The IBM-Lotus Corporation merger aided
that process.
Re-fashioningacquiring Polygram from Philips, Seagram moved from the low-margin spirits business to
the high-margin media segment. The Polygram acquisition by Universal Studios (80 per cent subsidiary of
Seagram) would also give it 30 per cent stake in MTV Asia. Through Universal Studios (which it bought
from Matsushita earlier) Seagram also controls 50 per cent in United Cinemas International and Totally
Nickelodeon along with Viacom.
After operating as an engineering conglomerate for 111 years, the US-based Westinghouse Electric
suddenly transformed itself into a media company. Since 1994, low profitability has forced the company to
sell its distribution and control unit, electrical supplies, office furniture business, defence and electronics
business, security systems, refrigeration transport and power generation businesses. On the other hand,
it acquired among others CBS, Infinity Broadcasting, Nashville Networks, Country Music Television and
American Radio Systems to transform itself into just CBS Corporation.
These are just a few of the motives behind some mega mergers. With money rolling around the globe, no
deal is too big. But important questions still remain unanswered. How many of these deals will really add
value? How many are really worth the price? How many would achieve the full benefits of integration?
Only time will tell.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

So Happy Together? Examining the Relationship Between VCs and Placement Agents
Alistair Christopher, Senior Editor

01/01/2001
Venture Capital Journal
Copyright 2001 Securities Data Publishing

A time-tested adage says the key to the real estate business is location, location, location. A similarly
quick and easy description of the venture capital business would almost certainly focus on deal flow, deal
flow, deal flow. Simply put, the first step to success in the VC universe rests on investment opportunities.
Finding the right opportunity can transform a VC firm from a struggling first-time fund into an established
franchise. And becoming an established franchise means industry-wide praise, recognition and the ability
to justify to your limited partners the absolute necessity of taking a premium percentage of a vehicle's
carried interest. In short, deal flow is of the utmost importance.
Given the importance of deal flow to success, it is no surprise that in the process of raising funds VCs
often stress the uniqueness and quality of their deal flow and their individual ability to source deals
through their own personal networks of contacts and friends. A firm located in the Midwest might make a
point of how their geographic location gives them something akin to proprietary deal flow on deals coming

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 out of middle America, while a brand new fund founded by two former technology executives will probably
point to their domain expertise as a reason they will end up seeing great information technology deals.
While it cannot be doubted that successful VCs spend a great deal of time sourcing deals through internal
efforts, it is equally true that these efforts are often aided quietly by the private placement groups at
investment banks, who are busy trying to find investors for capital hungry private companies. In fact, more
than just aiding, some placement agents at investment banks say they play an integral role in providing
deal flow to later-stage VC firms.
"At large, late-stage private equity firms, you might find that a large percentage of the deals they do are
agented," says Albert Bender, managing director of equity private placements at A.G. Edwards & Sons
Inc. Mike Mortell, managing director and co-head of private equity at Prudential Securities Inc., agrees
with Bender. "I think a lot of later-stage firms look for deal flow from investment banks," he says.
Placement agents work best with later-stage VC firms because, in addition to an up-front retainer of
$50,000 to $100,000, agents charge the companies they represent a fee that is a percentage of the
funding round raised by the company. This fee usually ranges between 6% and 10% of the round in
question, Mortell notes. Furthermore, since late-stage VCs traditionally invest in larger rounds of funding
for more developed companies, it simply makes economic sense for the agent community to focus on
late-stage deals, another placement agent says. The fee generated by agenting a small Series A funding
round is not worth the effort it requires, he comments.
Adding Value
Placement agents can play a significant role in a late-stage VC's deal flow because of the value they can
add to the process of putting together a round of funding, several agents say. This value comes in a
couple of different key areas, they note. One of an agent's biggest value-adds is simply in managing the
running of a fund-raising process for a company unfamiliar with, or unskilled at, raising money, said one
private equity banker.
Often times, companies do not really know how to set a valuation or what is standard market practice, he
notes. "A real key to making the process successful is going to the buying community with the right
valuation," the placement agent explains, adding that a skilled agent can shorten the amount of time it
takes for a company to raise money through his familiarity with the marketplace and knowledge of which
VC firms are interested in which type of deals.
Indeed, while placement agents say one of their biggest strengths is their ability to distribute a deal
broadly to any and every firm that might be interested in it, the key part of this skill set is knowing what
firms want. "I don't send a book to 200 firms, because firms will stop looking at my books because I sent
them something that didn't make any sense to them before," says A.G. Edward's Bender. "But if I have a
relationship with a firm, they will do a deal because it fits them and they believe it is at a fair-market price."
In addition to simply helping a company focus its message and put together the best pitch book possible,
Prudential's Mortell says agents add value because they perform their own due diligence before taking on
a private company as a client. This means that a VC does not have to worry about the quality of the
company it sees from Prudential, because the bank is not going to take on a flawed company as a client.
"We have a tight screen in place now, because investors have become pickier with their dollar," he says.
An agent's due diligence should save a VC time when he is evaluating a deal, because the agent is going
to be looking for the same qualities in a company that a VC is, Bender notes. "We only do deals for
companies with solid management teams, which is something that is also important to VCs, so this
helps," he adds. "We also provide added value in terms of research, because we will look and be able to
say how a company might fit into the competitive landscape in its market space."
Getting a deal from an agent can also be a benefit to VCs when it comes to fashioning an exit strategy for
a particular company, Bender notes. This is so because the larger goal of most private placement groups
is to place their bank on the inside track to underwrite a company's initial public offering or advise it later
on a merger or sale opportunity, he says.
"It is good for a company to get on the screen of one of our research analysts earlier than they otherwise
would," adds Bender. "Plus, going through the whole process of doing a private placement memorandum
with us prepares a company for an IPO." Another private equity professional says the main reason for his
group is to feed his employer's IPO pipeline.
In February, Corechange Inc. used Prudential as a placement agent to help put together an $18 million,
third round of venture funding, notes Hakan Wholin, a former investment banker who is now executive
vice president and head of business development at the enterprise software company. "Basically, this
meant we outsourced our financial concerns, which allowed us to focus on running the business," he

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 says. "The devil is in the details with a private placement, and an independent agent is great because he
can say this is standard, or this is nuts." While Wholin describes the fee paid to Prudential by Corechange
as big, he says ultimately the guidance and help provided by the agent meant the money was well spent.
Mixed Reaction
When it comes to placement agents, VCs themselves were not of one opinion in assessing agents and
the role they play in the marketplace. Some VCs say while they might take a deal from an agent on rare
occasions, they simply prefer not to work with agents because it does not fit into their strategy. "There is
sort of the hound dog and kennel dog approach in this business," says Jeffrey Jay, a general partner at
Whitney & Co. "A kennel dog stays in its cage and eats what it is fed, while a hound dog has a keen
sense of smell and knows what it wants and then goes and finds it. We think about what we want and
then go and find it."
"Traditionally, it was almost a negative thing to work with an agent," says Jim Boettcher, a general partner
at Charter Growth Capital. "But now with bigger and bigger rounds, they can be a help," he adds. Andrew
Fillat, managing director of Advent International's Global Venture Capital Group, says that while a
placement agent can be valuable in guiding the company it is working for through the process of raising
money, he does not think the agent adds any real value for a VC. Fillat also says he does not put a lot of
faith in the due diligence done by an agent because the agent, after all, is an employee of the seller. "You
have to do your own due diligence," he says, adding "the value a placement agent brings us is in bringing
us a deal."
Bob Grady, managing director of The Carlyle Group's early-stage venture fund Carlyle Venture Partners
says that besides having a stage focus outside of the interest of most agents, Carlyle likes to avoid
agented deals because of a fear that they are marketed too widely. "It is very rare that we would do a
transaction from a placement agent, mainly because our transactions are focused on areas where we
have an edge, but since a deal from an agent is usually marketed widely, it reduces our edge," he says.
On the other side of equation are VCs who do find a lot of value in the role played by agents. "We have a
lot of great relationships with agents," says Storm Boswick, managing partner at J. & W. Seligman & Co.,
a mutual fund complex that began doing VC investing at the expansion- and late-stage in 1997.
"An agent is involved because a company does not want to have to spend hours and hours of their time
raising capital," he says. "And this is good, because taking management away from growing revenue and
managing the business can have a destructive influence on a business." Boswick says that about one-
third of the VC deals in which Seligman invests are agented transactions.
About half of the deals done by TA Associates Inc. involve an agent or some other intermediary who
introduces the firm to a potential portfolio company, says Jonathan Goldstein, a managing director at the
firm. "Agents are very valuable," he says. "They are looking for great companies, too and some of my
best deals have come from agents," he adds. "I sort of consider them almost an extension of the firm."
Both Boswick and Goldstein say they do some of their own due diligence on all agented deals in which
they invest, not because they distrust agents but it is simply good business sense. "Effectively it is a
question of building trust," Boswick says. "If there is trust there with an agent, you can dig into their due
diligence and trust it, but in cases where you don't have that relationship you have to do the primary due
diligence, too," he adds.
Boswick also notes that he is unconcerned about agents marketing deals widely. "I don't care if an agent
has or hasn't sent the book to the whole country," he says. "If we do our job and like a company, this is
not a competitive threat."
Can We Talk?
The key to a successful relationship between a VC and a placement agent comes down to
communication in the end, both parties say. The goal of this communication should be for the agent to
understand a firm's philosophy and know its partners, says Salem Shuchman, a general partner at
Patricof & Co. Ventures Inc. "So this way they can say this is a good match for you as an investor and
they can say to the company this is a good investor for you," he adds, noting "we work hard to maintain
our relationships with agents."
Prudential's Mortell says the better his group knows a firm's sweet spot the more helpful it is in knowing
what deals to send that firm's way. "In my perspective, it is great to keep in touch with the VC firms," he
says. "From time to time, they should call us and tell us what is up with them and ask us what is going on
with us."

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

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 Beauty is in the Eye of the Beholder: Establishing a Fair and Equitable Value for Embryonic High-
Tech Enterprises
Jonathan Bell

12/01/2000
Venture Capital Journal
Copyright 2000 Securities Data Publishing

Before the advent of Internet-related businesses creating exponential growth curves that defied all logic
and experience, certain basic premises existed to allow for a somewhat scientific assessment of a start-
up company's value.
Investors understood the rate of return that was expected on their equity - 30% to 40% annually on a
compounded basis was common - and the entrepreneur could create a set of projections that indicated
that the sought-after return was achievable within the targeted time frame of the investors.
It has been difficult to benchmark the value of Internet-related businesses on those tried and true
methods. The cost structure and growth patterns of Internet businesses do not conform to historical
models.
Take the example of a start-up in the field of wireless communications. The company consists of an Ivy
League computer science professor (the founder) with a keen understanding of the architecture required
to minimize the size of a computer's hardware. Along with a graduate student or two, the founder has
created a working prototype of a hand-held computer that fits into a jacket pocket, yet has a screen with
the resolution of a standard personal computer. The founder believes that he has a winning application if
he can get to market before the major players in the field come out with a competitive model, but he has
never created a company, has no capital and may never have even received a paycheck for a day's labor
in the real world. His projections indicate that the first stage of development will require an investment of
$10 million. Spending the $10 million will allow the company to refine its technology from the theoretical to
the point where the working prototype can be mass produced. It may only be at that stage that it is
possible to forecast with any accuracy the cost of manufacturing and its price to consumers.
Unlike most businesses where value is based on a blend of historical performance and projected
earnings, the assessment of value in a start-up begins with the cost required to get to the next stage of
development. In the example of the wireless company noted above, the projected cost to reach a revenue
stage is $10 million. Without spending that amount of money, there is no point in spending any money at
all. Once the revenue stage is achieved, and the cost and price structure in the marketplace are clearer, it
may be possible to create projections that allow for a valuation based on a multiple of projected earnings.
In the wireless venture, the investors know that under any logical assessment of value, they should have
100% of the value of the enterprise, and the founder should transfer his rights to the product in exchange
for an employment contract at most. Yet experience shows the founder usually retains at least 50% of the
nominal equity in this type of situation and the investors will allow their money to be used for a year or
more before they start to assess whether they have made a wise choice in hitching their wagon to this
would-be entrepreneur. This result is achieved through the interplay of a number of emotional factors.
First of all, at this early stage, the founder often has a powerful attachment to his project and is unwilling
to part with a greater degree of control or potential wealth.
Second, despite the recent retrenchment in the high-tech sector, there remains a sizable flow of funds
seeking to cash in on the phenomenal success of technology ventures over the last 10 years. Some of
those funds are inherently "throw-away" dollars - money that exists because of the inflation of the stock
markets over the past decade. Investors do not like to lose "throw-away" dollars, but they do not have the
same sense of attachment to them that they might to funds that are required for daily living and expenses.
The investor community continues to require new investment outlets for those funds. While it may seem
counter-intuitive, the money cannot just sit around uninvested in a mattress. As long as the alternative
options, such as Old Economy stocks or bonds, yield anemic returns, the money will seek out higher
yielding investments and as a consequence the founder will have leverage in his negotiations with the
venture capitalists.
There is also a slight of hand at work in these negotiations. The VCs recognize that value within an
enterprise shifts over time. A wireless concept that may be valued very highly in the first round of
financing given its embryonic stage of development, allowing the founder to retain a majority interest in

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 the equity, actually usually falls in value relative to the value of money as it progresses from concept to
reality. This phenomenon holds true even in highly successful ventures.
In the example of the wireless venture concept, if the founder is able to obtain his financing, the capital
structure post-financing might look as follows. The parties agree on a pre-money valuation of the
company of $20 million based solely on the perceived needs of the enterprise for cash and the desire of
the parties to retain a certain degree of ownership. Based on that enterprise valuation, the investors
commit to make a $10 million injection, but only advance $5 million at the outset based on their desire to
see some progress on the venture before advancing the full commitment.
In return for their investment, the investors receive a "double dipping" Series A Preferred equity
instrument that allows them to get all of their money back, plus a yield of 10% per annum compounded. In
addition, the preferred equity converts into 30% of the common equity (16.5% of the common equity if the
investors do not advance the second $5 million tranche). The founder has retained two thirds of the
common equity, valued in accordance with his assessment at $20 million and probably gives away a
good portion of that to the two graduate students. The founder is also required by the investors to create
an equity pool to attract good management talent and that pool will likely come out of his side of the pie
as well.
At the end of the day, our founder may have retained only a bare 50% of his company, but of course he
now has money to work with, so he may not be at all unhappy.
In practice, all that has changed is that the investors have made a bet of $5 million on the wireless
concept and on the founder, and the founder has thrown his lot in with an investor group that may or may
not be able or willing to finance his next required round.
Nine months later, when the first $5 million has been spent, and the technology has begun to prove itself
but the enterprise is experiencing cash constraints, the parties will reconvene to make a new assessment
of value. At this stage, the investors normally assume the upper hand because the rights that they have
obtained in the first financing round preclude a free market for the founder to take his concept elsewhere.
The founder will have transferred his concept to the company and will have entered into a non-
competition agreement and a non-disclosure agreement that prevent him from taking up employment
elsewhere. He will also likely have developed a team that works with him to whom he has emotional ties.
As a consequence, his negotiating leverage may actually be weaker even though he has now proven out
his concept's basic viability.
The value of the enterprise at the initial round of investment was based as much as anything else on the
costs required to be invested into the enterprise to determine its viability. By the time of the second round,
the investors, now armed with cold-hearted calculators, will have had a better look at the technology and
will have begun to formulate a real-time value for the concept based on their perception of its probable
market.
Where once it seemed as if the sky was the limit, there may now be very real limitations to the viability of
the technology. The early-round investors may already be maneuvering to create an exit strategy, through
a sale of the company or a merger with a competitor.
In the second round of negotiations, which may take place either before or after the second $5 million
tranche has been invested, depending on whether the benchmarks of the original financing have been
achieved, the investors may value the company at a higher level, at $40 million or even $100 million, but
the growth in the overall company value is unlikely to be reflected fully in the value of the founder's
shares.
If the value of the enterprise has doubled, from $30 million to $60 million, the portion of that value
attributable to the founder may be reduced to 30% or less. Thus, in a capitalization chart for the second
round of financing, the first round investors will retain their preferred status while the second round
investors will be seeking a preferred and common equity return closer to their target range of perhaps
50% per annum. The founder may be relegated to a real-time value of 20% of the company because
even if he retains 30% of the common equity, the likely returns on the preferred investors' shares, given
the earnings potential of the company, indicate that in a liquidation of the company he will be lucky to take
home that much of the pie.
The moral of the story is that valuing a start-up enterprise is not so much a science as a process. Value is
far more about leverage and legal rights than it is about what a third party might pay for an equity interest.
Winners recognize that value shifts dramatically over time based on changing circumstances. Until a
liquidation event occurs, such as a sale or a public offering, the best one can hope for in any round of
value negotiation is to be setting the stage for the next negotiation.

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 Has the founder fared so poorly? At least he is now rich, by almost anyone's standards, and the
miniaturized hand-held computer that he once beheld as beautiful, is on its way to serve the world. Not
bad for an Ivy Leaguer. t
Jonathan Bell is a shareholder in the Boston office of Greenberg Traurig LLP, an international law firm.
He specializes in corporate and securities transactions.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

Chevron, Texaco to form worlds' fourth-largest oil

Nissa Darbonne; Leslie Haines

11/01/2000
Oil & Gas Investor
101
Copyright (c) 2000 Bell & Howell Information and Learning Company. All rights reserved. Copyright Hart
Publications, Inc. Nov 2000

More than a year after failed merger negotiations, Chevron Corp. is buying Texaco Inc. after all, for stock
and the assumption of $7 billion of debt. The combination will form ChevronTexaco Corp.-the world's
fourth-largest nonnational integrated oil, in terms of production and reserves, with 2.7 million BOE per day
of output and 11.2 billion BOE of proved reserves.
U.S. production will total 1.1 million BOE daily; proved reserves, 4.2 billion BOE.
San Francisco-based Chevron is offering one share of CHV per 0.77 share of White Plains, N.Y.-based
Texaco-an approximately $35-billion deal, which is being accounted for as a pooling of interests. The
price is an 18% premium to Texaco's preannouncement closing price, and 25% more than the 30-day
average of each companies' stock price prior to the announcement.
The offer is the equivalent of about $65 per share of Texaco. The companies failed to execute an
agreement in 1999 at $70 a share.
"While we think Chevron's acquisition of Texaco at this price represents a good long-term value for
Chevron, we also believe that the decision was made partly out of frustration for its own anemic share
valuation," said Chris Stavros, international and domestic oils analyst for PaineWebber Inc.
Shares of CHV have ranged from $69 to $97 in the past year. On announcement day, they closed at $82,
down $2.25 for the day. TX traded up, nearly $4 higher, closing at $59. The stock has ranged from $44 to
$67 in the past year. The deal will close some time next year.
The companies expect to save $1.2 billion, on an annualized basis, by merging, with approximately $700
million of that coming from "more efficient exploration and production activities," the companies report.
Another chunk of savings will come from consolidating corporate functions ($300 million). Approximately
7% of the companies' combined 57,000 employees (Chevron, 31,000; Texaco, 26,000) will be laid off.
Chevron shareholders will own approximately 61% of the combined equity. Dave O'Reilly, Chevron
chairman and chief executive officer, will be chairman and CEO of the combined company. Headquarters
will remain in San Francisco. Peter Bijur, Texaco chairman and CEO, will become vice chairman with
responsibility for downstream, power and chemicals operations. Richard Matzke, Chevron vice chairman
for upstream operations, will retain those responsibilities. The ChevronTexaco board of directors will
consist of approximately three-fifths of the current Chevron board members.
"This merger positions ChevronTexaco as a much stronger U.S.-based global energy producer better
able to contribute to the nation's energy needs," O'Reilly said in a press statement. "That's good news for
the country, because the United States will have an additional top-tier energy company better positioned
to compete effectively with the international majors."
Bijur said, "Texaco and Chevron are natural partners, whose historic relationship and operational fit are
highly complementary... We also share common values, including protection of the environment, active
support for the communities where we operate, and promoting diversity and opportunity in our workforce
and among our business partners."
ChevronTexaco will be the largest non-national producer of oil in the Caspian region. The companies will
also combine operations in deep waters offshore West Africa, Brazil and the U.S. Gulf of Mexico.

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 "The combination will significantly strengthen positions in core producing areas in North America and the
North Sea. Further, the combination will create an outstanding portfolio of growth opportunities in Latin
America and the AsiaPacific region," the companies report.
In power generation, Texaco's equity interests in 3,500 megawatts of power operating or under
construction, will add to Chevron's 26% stake in Houstonbased Dynegy Inc., giving ChevronTexaco
"more options in the fast-growing power and energy convergence businesses."
Both companies will have considerable interests in advanced technologies, such as Chevron's stake in
Illumina Inc., a biotech firm; e-ventures, such as their Houston-based PetroCosm Inc. oil and gas e-
procurement business; and alternate energy, such as fuel cells and gas-to-liquids conversion. They
anticipate the Federal Trade Commission will require some U.S. downstream divestment.
Stavros expects Texaco will have to relinquish its interest in Equilon, a west-- of-the-Mississippi retail and
marketing downstream venture with Shell. "The companies may also be forced to divest of some retail
sites in Texas or other southeastern states where both have significant market share." He confirmed his
Attractive rating on CHV and 12-month target of $98.
Lehman Brothers Inc. is advising Chevron. Credit Suisse First Boston and Morgan Stanley Dean Witter
are advising Texaco.
While most companies reported exceptional first-half results, the numbers for Texaco and Chevron were
mixed. For example, Texaco's European and Indonesian production declined due to scheduled
maintenance in the U.K. North Sea and lower lifting entitlements in Indonesia.
Texaco's downstream earnings fell 36% and Chevron's were down 20% in the first half, even though
Royal Dutch/Shell's and Exxon Mobil Corp.'s downstream results each rose about 30%, reports
EvaluateEnergy Plc, London.
Texaco's operating cash flow per share in the first half, $3.67, lagged behind that of Chevron's, which was
$5.72. It also trailed that of smaller companies such as Amerada Hess, Kerr-McGee, Talisman Energy,
Phillips Petroleum, Apache Corp. and Devon Energy.
-Nissa Darbonne and Leslie Haines

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

Consolidation to Continue
Evan Cooper

01/01/2001
On Wall Street
Copyright 2001 Securities Data Publishing

PaineWebber and Donaldson Lufkin Jenrette were two of the more prominent acquisitions in 2000, but
they probably won't be the last. According to a recent report on firm consolidation by the Securities
Industry Association, the long-term trend towards fewer firms will continue for several reasons.
"When the eventual [market] downturn comes, the experience of the past three to four decades is that
smaller firms will again be the first to close shop or be acquired by the larger firms," SIA wrote, noting that
in a negative market the larger firms themselves experience consolidation as a result of acquisition by
banks and foreign companies.
Large firms also are able to leverage their distribution networks, their productivity and their technology to
increase market share, which has a crowding out effect on the rest of the industry.
"The combination of a large firm's increased market share on a dwindling market is a double whammy to
the middle and small market players," says George R. Monahan, vice president and director of industry
studies.
Another reason for consolidation in the U.S. securities industry - as odd as it may seem - is a change in
German tax law. Last July, Germany overhauled its tax code, resulting in huge declines in corporate tax
rates and elimination of the capital gains tax. This is expected to unleash a wave of overseas investing on
the part of German banks and insurers, which have been unable to unload their holdings in major
German industrial companies because of the high tax rates.
"The recent large acquisitions by Deutsche Bank, Dresdner and Allianz are only the beginning," the report
said.

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 Finally, technology will continue to play the major role in consolidation, and continue to favor the large,
well-capitalized firms that can afford and leverage its use.
"The more investors gravitate to Internet-based investing, the less firms will need to rely on wide regional
branch and satellite office networks, which means a further squeezing of the local and regional firm."

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

Invest in Japan Now, Despite Problems, say VCs

Barbara Etzel

01/01/2001
Venture Capital Journal
Copyright 2001 Securities Data Publishing

NEW YORK - Japanese businesses may be taking it on the chin, but venture capitalists are visualizing
the world's second-largest economy as an undeveloped Silicon Valley. As a result VCs are flocking to
Japan, with some Silicon Valley firms even relocating to Japan to capitalize on the potentially huge
opportunities.
Venture capitalists argue that VC firms interested in the region should be active now. "By next year I think
it will be a little too late," said Yoshito Hori, chairman and chief executive of Apax Globis Partners & Co.,
which was formed in 1999 when Globis Capital joined with Patricof & Co. The firm closed on a $200
million Japan fund earlier this year in March.
The number of venture funds active in Japan is growing, rising 23% to 160 from 130 in 1996. "There is a
new group of venture capital firms in Japan - of which we intend to be a leader - that are well-funded and
forward thinking," said Alan Patricof, whose eponymous firm is a member of Apax Partners & Co.'s global
venture capital network, which has $7 billion under management.
Some view the opportunity as so compelling, they are not waiting for companies to contact them. Instead,
they are creating the company and then finding the financing.
One such company is Giftken.com, an Internet-based gift service started by Japan Internet Ventures LLC.
The VC firm invested $500,000 up front to get the company started, and then looked for a U.S. partner,
which it found in Giftcertificates.com.
"This is a great model if you are sure you can get financing," said Bruno Grandsard, managing director of
Japan Internet Ventures LLC, speaking at an Internet venture capital conference sponsored by the Japan
Society in New York in November. There is valuable technology located in the U.S., and it can easily be
brought to Japan, said Grandsard, whose VC firm incorporated in the U.S. in January 2000. The firm has
invested in two companies and has a staff of eight, six of whom are in Japan. Nonetheless, he
acknowledged that the risks of obtaining funding later are huge. "We may not end up with funding," he
admitted.
His role with Giftken.com also fills another role. "There's a big need in Japan for very hands-on investors,"
said Grandsard.
For most Japanese entrepreneurs, this is their first business venture and they can use mentoring and
advice from seasoned professionals. Increasing the importance of VC's involvement in management is
the challenge of hiring entrepreneurial talent, like engineers and chief executive officers, because many
potential candidates don't want to work for risky operations.
Still, there are indications that all of that is changing. Employees increasingly are shedding the idea that
jobs are for life and are willing to take on risky, but potentially lucrative situations. And, the inability of
some college graduates to find jobs in the current economic down turn also has meant that people are
evaluating nontraditional employment routes.
"In 1999, there was a fundamental change in employees' attitudes," with MBAs and engineers leaving
their corporate jobs to start new ventures, said Apax Globis' Hori.
Although the shaky economic climate is helping create a bigger labor pool for entrepreneurial companies,
it also means that start-up companies will have to operate in a tough economy. Japan is still reeling from
its worst economic slowdown since World War II.
In November, a private research firm, Teikoku Databank, said that corporate failures reached a post-
WWII high, rising nearly 23% in October compared with the year-earlier period. The debts the companies

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 incurred were 8.561 trillion, or $79 billion, which was double the previous record of 4.264 trillion, or $39.5
billion in July.
Still, some have fearlessly jumped into the fray, with their eyes focused on the huge opportunity.
One U.S.-based firm, Netyear Group Corp., decided last year to move its headquarters to Tokyo from
Silicon Valley. The company is an Internet professional services company that specializes in incubating
global businesses.
"In Japan the development of the Internet is behind the U.S. and there is a huge opportunity," said Fujiyo
Ishiguro, who is Netyear's chief executive.
In 1999, Netyear Group launched its first $15 million fund for venture incubation, which currently is
funding 22 business-to-consumer and business-to-business Internet companies. It likely will launch a
second fund in 2001 that may be expanded to include VC activity.
In addition to the enthusiasm over the Internet's potential in Japan, regulatory and legal changes have
given a boost to VC activities. Now, stock options can be issued, a key compensation tool of U.S. start-
ups. It is easier for companies to go public since an over-the-counter stock market was started and the
requirements were eased.
"The Japanese government has started to change psychology by changing laws," said Patricof.
The amount of venture funds invested into Japanese companies hit a low of $8 million in 1997 amid
difficulties in Asian economies, and stands at $520 million through the third quarter of 2000, according to
Venture Economics, the publisher of Venture Capital Journal, and the National Venture Capital
Association.
One particular change is that the amount of VC dramatically increased. Where the average deal size was
$200,000 to $300,000, now the investment amounts tends to range from $2 million to $6 million, with
some deals as much as $20 million, said Hori. His firm likely will launch a second fund in 2002.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

Placement Agents: Friend or Foe

Jennifer Strauss

01/01/2001
Venture Capital Journal
Copyright 2001 Securities Data Publishing

When it comes to investing, a venture capital firm may be able to raise a mega fund, but it will be the last
one if the firm can't put that money to good use with solid, worthwhile investment opportunities, or in other
words, deal flow.
While most venture capitalists are in agreement that sourcing good opportunities can transform almost
any VC firm from a dud to a stud, there is some disagreement on whether or not that deal flow should
come from its internal network or from placement agents.
In this month's cover story Senior Editor Alistair Christopher talks with some VCs about the pros and cons
of using placement agents and their role in the VC market - a role that stretches from merely aiding VCs
to being an indispensable spoke on the wheel.
Also in this month's issue, Associate Editor Charles Fellers takes a look at some of the new realities for
VC investing in the Northeast.
Lastly, the VC community has been witness to many groundbreaking events in its time. It has also seen
its fair share of investments go belly-up especially in the Internet sector; however, it has probably never
seen a VC firm turn away or return commitments for its latest fund. In late November, Crosspoint Venture
Partners suspended plans for a $1 billion fund citing the current state of market conditions. Only time will
tell if Crosspoint's actions are a sign of things to come, or just an extremely cautious firm playing it safe.
Regardless, it bodes for an interesting 2001.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

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