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Bloomberg Market Movers—Video and Transcript

August 15, 2006

Interview with Terry Garnett

by Monica Bertran

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MB: Well buyout firms have become an increasingly active force in the merger and acquisition market. Joining us now with a closer look at the private equity landscape and talk about some deals he’s done is Terry Garnett, partner of the buyout firm, Garnett & Helfrich. Thanks for joining us today, Terry.

TG: Thank you Monica

MB: So let’s talk about, how does your firm see the buyout market in terms of deals?

TG: Well we’re specifically focused on technology and partnering with large companies that are looking to spin out key assets that on their behalf we can grow and take to the next level for them.

MB: And that seems to have been successful. You see a lot of companies trying to do this at this point?

TG: Well there are a tremendous amount of assets that have been raised in the private equity world, especially in the last few years and I think more going into the future and we’re going to see many more large deals and ones of the sort we work on as well.

MB: Why do you think that’s been, that there’s been so much capital in that particular area?

TG: Well specifically technology, I think the industry has matured. There are many large companies. There are over 200 companies globally with more than $5 billion in sales in the technology world. And the cash flow has become much more predictable which lends itself to the kind of borrowing to do a private equity transaction.

MB: Now when you look at the NASDAQ or even the NASDAQ 100, you see some of the biggest technology companies, but the NASDAQ as a whole hasn’t done so well. So when you look at companies that doing this, are there a lot more companies out there to be bought or spun off?

TG: Well I think partly because of Sarbanes-Oxley and the scale of kind of the requirements to go public, you’re seeing many companies with under 100 million sales or 200 million sales going private and they are using private equity investors as the vehicle to do that.

MB: OK so we could see more deals even if the market doesn’t rally that much.

TG: I believe so and there will also be mergers of strategic partners buying some of the smaller companies on the NASDAQ as well.

MB: Let me ask you about some names here. Private equity really has been aggressively playing in the M&A market recently. Who are some of the likely out of favor type names you think?

TG: Now that’s a controversial question, I’m not sure I want to answer that one. I think if you look at situations where companies were very profitable and are now break even or losing money, and they really need a change in management, as well as they need a steward for the business, those are the ones that most likely I think to fit that profile.

MB: And we’ve seen a shift as well, a lot of hedge fund play here. How much of that have you seen in this particular area?

TG: I think it is a very important component. I think the activist shareholders side of this is putting a lot of pressure on management. So these companies, if they do get off track that either the company gets sold or private equity gets involved. I think it’s partly from the shareholder activist side that’s being driven.

MB: What about competition? A lot more out there?

TG: I think there is. I think you need to have a very specific strategy as a private equity firm that differentiates you. Because if you are a generalist, I think it is a very tough battle. There are many, many companies. If there is an auction, and a company is being sold, you may have a dozen or two dozen bidders and that means it’s going to be a very efficient price that gets paid.

MB: And that is why your company focuses on technology.

TG: We partner, in fact two of the deals we’ve worked on recently, one with Computer Associates, we spun out their Ingres database business, and the other with Nortel, to spun out their Blade Server business. In both cases they kept a 20 to 25% stake and looked at us as being kind of the operating entity to build these pieces that were no longer strategic to their long term strategies.

MB: What is the most promising investment opportunity now do you think?

TG: I think one of the major trends, especially in the enterprise software world is going to be Open Source. And by that I mean that we haven’t seen in enterprise software the kind of price competition that we’ve seen in hardware, semiconductors and storage. And I think people that adopt either ‘software as a service’ model that pioneered and also RedHat in the Open Source segment, is going to change the pricing and the business models per se. So what you’re seeing is a shift away from complete technology innovation driving growth and much more of who can invent a new business model that can take advantage of taking revenue from the incumbents.

MB: Would you like some more positive, I guess, sentiment in the technology group? I mean would that make your business better if we saw that? Or it really doesn’t matter?

TG: It is somewhat counter intuitive. Because I think if you see companies that are very large going through restructurings, they actually look to us as candidates to help them with the pieces that help them reduce their costs; take pieces off that don’t strategically fit. And going back to the Open Source model, if the economy does have a tough go here in the next couple of years, customers are going to be looking for cheaper price alternatives.

MB: So you’re in the sweet spot then.

TG: Well let’s hope so

MB: Alright, Terry. Appreciate you coming in. Again, Terry Garnett, partner with Garnett & Helfrich.