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Posted: April 21, 2011

Getting the Deal Wheel Rolling

Capital markets are still rough, but they're starting to move

David Lewis

John Kelley used to be chairman, president and CEO of McDATA Corp., which was acquired in January 2007 by Brocade Communications Systems Inc. for about $713 million in stock.

Before departing McDATA, Kelley led the company through a series of acquisitions such as the acquisition of Minneapolis-based Computer Network Technology Corp. for $235 million in stock and debt.

This may be ancient history in financial-market terms, but in the past nine months or so it all came to life for Kelley again as chairman and president of the Denver-based medical imaging company CereScan, except that now the shoe is on another foot.

CereScan has its offices and a clinic in Denver, and plans to add 20 new state-of-the-art neuroimaging locations in the next couple of years.
Thus Kelley is now less in mega-merger mode and more in startup mode.

"We have plans to expand to 10 cities. We are currently looking for funds ourselves, and in the last nine months I have been able to raise about $3 million or $4 million for this company," in the process obtaining a first-rate and utterly up-to-date education in the post-Great Recession's ways of obtaining capital.

Which Kelley has kindly offered to pass along to you.

"I can give you a view of venture capital, private equity and public companies because I actually have to do it," he says. (Not that all these capital categories apply to CereScan, Kelley notes.)

Conditions differ in each of the above categories - more on that in a moment - but the outlook overall has brightened some.

"Money is starting to free up - not with the banks - but transactions are starting to be looked at. The boards of companies are saying, ‘Maybe this isn't going to go down any further,'" he says. "So nobody is going to buy something and have it go down by 20 percent," housing markets aside.

Experts and insiders agree capital markets today are rough, tough but not insurmountable.


In an uneven fashion, merger and acquisition markets even seem prepared for a muscular comeback.

Bank lenders aside, Kelley likes what he sees happening.

"The acquisition of technology companies has heated up, and we're seeing tech companies beginning to make offers, to do acquisitions," he says. "Clearly that tide has changed over the last year, I would say, so these corporations are definitely looking at acquisitions."

Kelley also sees real estate acquisition in the form of REITs (real estate investment trusts), health care and related companies, energy and green companies all as up-and-comers. Technology in numerous forms continues to attract attention, except for gadgets, which now are the domain of big corporations.

Denver-based Hendrik Jordaan serves as chair of private equity investments and buyouts practice of the law firm of Morrison Foerster (see www.mofo.com/hendrik-f-jordaan). He's bullish on growth and M&A prospects.

Private equity firms have about one half-trillion dollars on the sidelines, he notes "and all that money is going to put to use increasingly over the next 24 months."

Public companies have several trillions on their balance sheets, the most in more than 50 years, which typically will be used either for stock repurchases, mergers and acquisitions, or dividends.

Thirdly, "on the supply side of deals you have companies that have not moved, not traded, and so more and more companies are going to market as you see multiples move up."

Fourth, "confidence is returning to boards of directors, who are more willing to do a deal."

"Those trends all point to a very frothy and robust M&A market," Jordaan says.

But what about the vibes picked up by vibrant entrepreneur Luke Beatty?

You will recall Beatty's Denver-based Associated Content last year sold to Yahoo for a reported $100 million.

Now with Yahoo, Beatty cautions that he is "not so much a prognosticator as a disturber." But he says he observes two distinct types of venture capital and other finance people these days: the sanguine, cheery type and the compulsive, nervous sort.

The prevailing mood "goes from being frothy to really conservative and really terrified - a huge range - sometimes private equity and venture guys say this is going to be the first forked double-dip in the economy; others think we're 20 percent out of the woods now, we'll be 50 percent out of the woods by the third quarter, and hopefully all the way out by the end of the year - a huge range," Beatty says.

Nor does Jordaan disagree with that two-fold assessment, really.

Jordaan doesn't want his analysis to sound overly frothy because countervailing any good feelings are the facts that result in the schizophrenia Beatty describes.

"Depending on which segment of the market you are playing in, leverage may not be returning as quickly as some had hoped," Jordaan says. "When you look at multiples for larger deals it is '07 all over again in terms of the amount of leverage, the terms that are being offered by lenders," and deal covenants and features.

"But on the lower end of the market, which is a lot of what Colorado sees, you don't have lenders quite as willing to move," adds Jordaan, "so to get the amount of leverage you need for deals on the smaller side, it is not as frothy, it is more restrictive," not to mention a degree of regulatory uncertainty and the like.

It is good to become your own venture capitalist, which is the position in which David Prokupek figuratively finds himself.

Prokupek is chairman and CEO of Denver-based Smashburger, and also managing partner and chief investment officer of the Denver-based Consumer Capital Partners, the $1 billion private investment firm that provided the initial $15 million funding for the burger company. Now, a burger chain can have plenty of sizzle, but it is not exactly the killer app of high-tech lore. Yet Smashburger after four years has 90 stores and hundreds more in the pipeline.

"Starting Smashburger and deciding to invest was not a business school case study; it was really a fair bit of risk," Prokupek says.

Prokupek looks at about 20 business plans a week. What does he advise?

"One is, just keep trying to stay focused. Get your pitch idea down to three or four sheets of paper so people can understand the big idea. Keep trying, keep networking. The economy is getting better. Be realistic about valuations and what to expect.... The rest should take care of itself."
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