Timing is Everything
by Olaf de Senerpont Domis
May 7th,2002

Charles Hale
Technology divestitures and spinoffs are notoriously tricky investments for financial buyers.

Carve-outs often require copious amounts of capital to return to health and are highly unpredictable when it comes to cash flow. Employees - a vital asset for technology concerns - are often demoralized after years of indifference or neglect from the parent company.

For these and myriad other reasons, failed tech buyouts and investments abound. Texas Pacific Group put up $117.5 million as part of the $440 million buyout of Campbell, Calif.-based Zilog Inc. in 1998. The chipmaker recently filed for bankruptcy. Similarly, the stock price of ON Semiconductor Corp. of Phoenix, which got a $187.5 million investment from TPG in 1999, has plunged, and the company has had trouble fulfilling its debt obligations.

Then there is Hicks, Muse, Tate & Furst Inc., a Dallas-based private equity fund that has lost out on investments in such tech duds as Inc. and StreetZebra Inc.

Despite the risks, a new investment firm quietly surfaced in April that focuses squarely on the tech world.

Divestiture Growth Capital, or DivestCap, made its first investment April 24 when it bought a software unit, called Summit Design, from struggling electronic design automation company Innoveda Inc. Innoveda, in the midst of a $160 million acquisition by larger rival Mentor Graphics Inc., is the result of the $55 million merger in 1999 of Summit and Viewlogic, themselves struggling EDA companies. DivestCap did not disclose the size of its investment, but it handed management of the newly independent company about one-third ownership, while the firm got the rest.

Hale spoke to The Daily Deal about what differentiates the new firm, its investment goals and the challenges surrounding tech buyouts.

The Daily Deal: What separates DivestCap from other firms that focus on technology buyouts or investments?

For even the healthiest divestitures, making formerly noncore assets great requires a unique combination of buyout, venture and even workout skills. VCs typically do not understand divestiture imperatives and have trouble financing existing, substantial businesses. Buyout firms, on the other hand, typically do not understand technology and, most important, prefer to avoid the type of hands-on work required to help make formerly noncore assets great.

How many companies do you eventually intend to have in your portfolio?

We don't have a number in mind. We don't want to have so many that we can't devote the appropriate resources to each one. It really depends upon how many partners we hire. I'd say it's hard for any given partner to have more than three.

Who is backing you?

Our fund is from a large hedge fund with additional backing from a variety of other funds and wealthy individuals. [Hale declined to name investors.]

Are you focusing on a particular technology sector?

We like enterprise applications, infrastructure and tools software companies; systems integrators and hardware maintenance and consulting services; and telecom systems and equipment.

Will you team up with other funds or with banks?

We've partnered with a number of large buyout firms and big PE funds in potential deals, but ultimately we did not win.

How did the Summit deal come about? Was it a matter of Mentor not wanting that particular piece of Innoveda?

We saw a company that fit our criteria independent of Mentor. Our interest in Summit came up before Mentor started talking to Innoveda; we made our deal separately.

So what do you plan to do with Summit?

We plan to grow it into the leading ESL [enhanced system level] design company in the market. This company will give us a premier shot at doing that. Then an IPO or a sale is the eventual goal.

It takes a long time to build and grow companies, so we don't have any immediate expectations on timing. We're making a very long-term investment.

What are your top priorities at Summit?

First we need to make sure the customers are happy - customer satisfaction has to be the cornerstone of our approach. Then internally we need to focus on the team. In many cases like this, the teams have not been paid much attention.

The first rule of a tech turnaround is it is always much harder than it looks. The second rule is you have to stabilize the company. Stabilizing a tech company requires investing heavily, but you also need to rationalize certain things and move twice as fast and twice as hard because you are racing against time. It's a very tricky question and one that is not handled right most of the time.

The other rule, generally, is that if a division has been neglected by a parent, you are going to need to kick-start change in the organization, and a strong investor helps do that.

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