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CNBC Power Lunch—Video and Transcript

September 19, 2007

Interview with Terry Garnett

by Sue Herera and Jim Ellis

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SH: In the never-ending quest for the next hot investment, one private equity firm has found great success in a new type of asset class they call the venture buyout. The shop is Garnett & Helfrich and their goal is to rescue tech units from their parent companies and then spin them off into a standalone billion dollar enterprise. It sounds really good, doesn’t it? But it’s probably not all that simple. Here to tell us more is co-founder Terry Garnett. Terry, welcome. Pleasure to have you here.

TG: Good morning, Sue. How are you?

SH: I’m fine, thank you. You know on the surface it seems to make perfect sense but I’m sure there’s a lot more to it when you go into making a deal. Tell us how this works. I mean are you contacted…how do you do your job, in other words? Do you seek these companies out or do they seek you out?

TG: Yeah, no definitely, we seek them out. In essence, the technology industry has become a very mature industry. There’s now two hundred companies around the world with over five billion in revenue. And within those large scale companies, there are a lot of under-managed assets and products that kind of get lost in the shuffle. So what we typically do is we approach the board or the CEO and we actually identify a particular business that we’ve done a lot of homework on. And we go to them with an actual plan and say if we were to carve this out, with your support—you ought to keep a minority interest, you ought to participate with us. And here’s the three to five year plan on where we’re going to take the company, reinvent it, bring in new executives, and change the business model.

SH: Okay, Jim Ellis of BusinessWeek joins us as well; he has some questions for you. Jim?

JE: Now, Terry, I’m wondering. Technology buyouts can be awful dangerous sometimes simply because a lot of talent…a lot of the assets of the company walk out the door each evening. What do you do in a situation like yours to make sure that the talent stays particularly when often you’re talking about an independent firm as opposed to a unit of a much more stable larger company that might offer more upside potential for them at least in the short term?

TG: Yeah. In essence, what we try to do is structure the new company with all the motivations and incentives of a start-up. So we typically set aside up to twenty percent of the stock for the employees and for many of the new executives we’re going to bring in. And many of these units and products have been starved for resources. So, in fact, we get a very positive reception from the unit when they’re told that this is going to be carved out because we’re going to give them the resources and allow them to hire the people to allow them to really be successful. And when it’s successful, they’re going to share in the upside.

SH: Yes, so they’re getting attention that they were not getting from the bigger parent company, in essence.

TG: Absolutely.

SH: Terry, what about the situations like we’re going through right now where you have talk of a credit crunch, the economy may be slowing. Do these types of economic environments create opportunities for you or does it slow down business?

TG: Actually, I think it will increase our opportunity because I think as large scale companies look to rationalize their portfolio, you know they can’t do everything. And one company that we did a carve-out with, they have over twelve hundred products and they have a single sales force. So the top products get all the attention and the ones that are down in the lower ranks may be great technologies but they don’t get that development resource or the sales attention. And so for them, having an independent entity where they can build their own infrastructure and sales force empowers them. And again, we have the parent company share in the upside by keeping a twenty or twenty-five percent stake. So they’re very enthusiastic about this.

SH: All right, Terry. We’ll have to leave it there. Thank you very much for joining us today. We appreciate it. Nice to see you.

TG: Thank you, Sue.