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From:

"Dan Primack"

Name:

Dan Primack

Email Address:

Dan_Primack@fortune.chtah.com

Subject:

Term Sheet -- Wednesday, December 8

Date:

08-12-2010 15:39:23
Message

Fortune Finance Street Sweep Term Sheet Economics Tech Wall Street Washington

The Term Sheet by Dan Primack

Wednesday -- December 8, 2010
Email Dan | Follow Dan on Twitter | Subscribe

Random Ramblings
Whenever I have written in support of changing the tax treatment of carried interest from capital gains to
ordinary income, someone has written in to say: Gains from founders stock is similar to carried interest, in
that founders dont put up actual cash for their shares. They just put in time and effort. Therefore carried
interest also can be considered a capital gain.
My stock reply has been to acknowledge the similarity, and then to warn against making the argument:
You are right, I will say. But consistency (for me) actually would dictate that founders stock be treated as
ordinary income, rather than dictating that carried interest retain its capital gains status. That may not be a
path you want me to pursue
Well, Vic Fleischer apparently is going there. For the uninitiated, Fleischer is the U Colorado professor
(temporarily hanging out at NYU) who kicked off the carried interest kerfuffle with a paper titled 2 and 20.
The NY Post reports that Fleischer is nearing completion on a paper that would recommend changing the
tax treatment on founders stock from capital gains to ordinary income. He estimates that closing the
loophole would generate around $100 billion in additional federal tax revenue per year.
As I have told people for years, I struggle with this one. Consistency in logic and argument is important, but
it also can have its limits. At times I am willing to repeat Walt Whitmans famous phrase: Do I contradict
myself? Very well then I contradict myself.

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The issue here is whether changing this tax break would significantly dissuade potential entrepreneurs from
hanging their own shingles. My gut feeling is that it would, and perhaps in great numbers. There are many
factors that contribute to the creation of an entrepreneur including passion for the product and a desire to
be ones own boss but the prospect of future riches is right up there. Given how few entrepreneurs
actually succeed, it would seem counterproductive to lighten the pot of gold.
This stands in contrast to my feelings on carried interest, as not a single significant VC or PE pro has ever
promised to change careers were that tax treatment altered.
Im still working through this in my mind, and am interested in your thoughts. Not thoughts based on selfinterest, but ones based on reason. Ill also reach out to Fleischer to see if his paper includes a cost/benefit
analysis.
*** Speaking of tax things Im working on today: Been spending a bunch of time on the phone with
middle-market PE pros and bankers, including many who told me in 2009 to expect a 2010 deal-rush
ahead of the anticipated increase in general capital gains rates.
Now that it looks like those rates may remain stable, Im interested in two things: (1) Did that rush
materialize, and (2) Is there a big pipeline of 12/31 deadlines that now will be relaxed.
General consensus on the first is that there was an impact particularly on family-owned businesses but
that it was mostly around the margins. On the second, most people I spoke with have at least a few taxdriven deadlines, and are still working toward them until the Obama/McConnell deal is actually done.
*** Yesterday I visited the Cambridge, Mass. office of Bessemer Venture Partners, where the firm recently
relocated after wrapping up a 25-year lease in Wellesley (who says VCs arent long-term investors?).
Lovely ex-industrial space just a stones throw from Kendall Square, but the real highlight isnt immediately
obvious.
To find it, you need to open up a door camouflaged within a white-board wall. There you will find the rest
rooms, which are wallpapered with original memos supporting past BVP investments. For example, right
beside the toilet is Jeremy Levine's 2007 explanation for why BVP should invest in LinkedIn (seems that
positioning was haphazard). I would have spent an hour hanging out in there, but that probably would have
seemed weird.
Well, perhaps no weirder than my decision to post a photo of the BVP bathroom. See it here.
*** Deal Update: Two weeks ago I reported that Wellspring Capital Management was in talks to buy
Hooters of America. Now, S&P says that the firm has lined up a $143 million unitranche loan for the bid,
from NXT Capital and Ares Capital.
*** Quiz time: Can you name the large PE firm issuing some form of "tracking stock" to employees, ahead
of a likely IPO listing. Hint: No, it's not Carlyle.
*** Correction: Yesterday I reported that DST is the largest outside shareholder in Facebook. Seems I was
wrong. Someone senior at Accel Partners wrote in to let me know that his firm still holds that distinction.

5 things to read @Fortune.com

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Pre-Marketing, including another angel investor shelves his checkbook, Obama gets his second
stimulus, Cuomo considers perjury charges against Rattner, the recipe for Groupon's secret sauce
and Jon Stewart pits Bernanke against Bernanke.

Quiz Time: Would the SEC consider you an insider?

Beth Kowitt: Foursquare is funded through 2011
Jill Priluck: The founder's life for young VCs
Eric Falkenstein: Why Derek Jeter deserved $45 million but most CEOs don't

The Big Deal

Apax Partners in in exclusive talks to acquire Dutch facilities services group ISS for $8.5 billion, according
to Reuters. ISS currently is owned by Goldman Sachs and EQT Partners, which have been exploring a
public floatation for the company
Apax doesn't have enough cash on hand to finance the equity tranche alone, so is seeking co-invests from
sovereign wealth funds and many of its own limited partners. www.apax.com

VC Deals
DocuSign, a Seattle-based provider of an electronic signature cloud platform, has raised $27 million in
Series C funding. Scale Venture Partners led the round, and was joined by return backers Sigma
Partners, Ignition Partners, Frazier Technology Ventures and SalesForce.com. www.docusign.com
Waze, a Palo Alto, Calif.-based social mapping company, has raised $25 million in Series B funding.
BlueRun Ventures led the round, and was joined by Magma Venture Partners, Vertex Venture Capital and
Qualcomm Ventures. www.waze.com
Scivantage, a Jersey City, N.J.-based provider of front and middle-office tech techn solutions to the
financial services industry, has raised $22 million in private equity funding from Brown Brothers Harriman
Capital Partners. It also secured $6 million in senior debt from Provident Bank. www.scivantage.com
TYRX Inc., a Monmouth Junction, N.J.-based provider of medical devices that help reduce surgical-site
infections associated with implantable pacemakers and defibrillators, has raised $20 million in new VC
funding. HLM Venture Partners led the round, and was joined by return backers Clarus Ventures and
Pappas Ventures. The company also secured $4 million in debt financing from Comerica Bank.
www.tyrx.com
Nimble Storage, a San Jose, Calif.-based provider of converged storage and backup solutions, has raised
$16 million in Series C funding. Return backers include Accel Partners, Lightspeed Venture Partners and
Sequoia Capital. www.nimblestorage.com
Giveo, developer of an SaaS platform for social cause marketing, has raised $1.5 million in Series A
funding, as reported by TechCrunch. Access Venture Partners led the round, and was joined by Grotech
Ventures and Sentinel Trust. www.giveo.com

Private Equity Deals

The Blackstone Group and Bright Food Group Co. (China) are teaming up to bid on GNC Holdings, a
Pittsburgh-based retailer of vitamins and supplements, according to Bloomberg. GNC filed for a $350
million IPO back in September and was acquired for $1.65 billion in 2007 by Ares Management and

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Ontario Teachers Pension. www.gnc.com

Colony Capital and Goldman Sachs have dropped their joined bid for French furniture retailer
Conforama, according to Les Echos. The Carlyle Group and South African strategic Steinhoff International
Holdings remain in the process, which is expected to generate more than $2 billion.
Diamond Castle Holdings has acquired Professional Directional Enterprises Inc., a Conroe, Texasbased provider of directional and horizontal drilling services to oil and gas E&P companies. No financial
terms were disclosed. The seller was Harren Equity Partners, while the sale process was managed by
Harris Williams & Co.
Dunedin Capital Partners has sponsored a management buyout of CitySpring, a British provider of
same-day distribution services. The deal is valued at more than 50 million, including capital commitments
for future acquisitions. www.dunedin.com
KSL Capital Partners has completed its acquisition of The Squaw Valley Development Co., including the
Squaw Valley USA ski operations, the Village at Squaw Valley and related real estate holdings. No
financial terms were disclosed, except that KSL committed more than $50 million for capital improvements.
Squaw Valley is located near Lake Tahoe, and played host to the 1960 Olympic Winter Games.
www.kslcapital.com
MBK Partners has agreed to acquire Invoice, a Japan-listed provider of consolidated billing services, for
$212 million. www.mbkpartners.com
The Riverside Company has acquired WhatCounts, a Seattle-based provider of email marketing
solutions and related professional services. Riverside will merge WhatCounts with existing portfolio
company Mansell Group. www.riversidecompany.com
Technos, a Brazilian watchmaker, has raised an undisclosed amount of private equity funding from DLJ
South American Partners and Partners Group.

PE-backed IPOs
E-Commerce China DangDang Inc., a Beijing-based B2C ecommerce company in China (with an
emphasis on books), raised approximately $272 million in its IPO. (offering range of $11-$13 per share). It
will trade on the NYSE under ticker symbol DADA, while Morgan Stanley and Credit Suisse served as colead underwriters. Shareholders include Tiger Global Private Investment Partners, DCM-Doll Capital
Management and IDG Technology Ventures. www.dangdang.com
YouKu, a Chinese video sharing site, raised around $202.85 million in its IPO. The company priced nearly
15.85 million American depository shares at $12.80 per share, compared to plans to offer 15.37 million
shares between $9 and $11 each. It will to trade on the NYSE under ticker symbol YOKU, while Goldman
Sachs (Asia) served as lead underwriter. The company had raised $110 million in venture capital funding,
from firms like Brookside Capital, Chengwei Ventures, Maverick Capital and Sutter Hill Ventures.
www.youku.com

Exits
Hellman & Friedman is looking to sell Goodman Global, a Houston, Texas-based manufacturer of
residential and light commercial heating, ventilation and air-conditioning equipment. Reuters reports that

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the deal could fetch more than $4 billion, with possible strategic interest coming from Japan. Goodman
Global was taken private in 2008 for $2.65 billion, and filed for a $500 million IPO this past May. It withdrew
the offering last month. www.goodmanglobal.com
M/C Venture Partners has completed its sale of competitive local exchange carrier (CLEC) Cavalier
Telephone Inc. to PAETEC (Nasdaq: PAET), for $460 million in cash. www.cavtel.com
Small Bone Innovations Inc., a New York-based orthopedics platform, has sold its shoulder-related
assets to France-based Fx Solutions. No financial terms were disclosed. SBI has raised over $150 million
in private equity funding from Viscogliosi Brothers, Olympus Corp., Khazanah Nasional Berhad, Malaysian
Technology Development Corp., The Family Office of Bahrain, Trevi Health Ventures, NGN Capital, 3i
Group and TGap Ventures. www.totalsmallbone.com
SalesForce.com (NYSE: CRM) has agreed to acquire Heroku, a San Francisco-based provider of a cloud
application platform for writing Ruby-based applications. The deal is valued at $212 million in cash. Heroku
had raised $13 million in VC funding from Ignition Partners, Redpoint Ventures, Baseline Ventures and
Harrison Metal Ventures. www.heroku.com
TD Bank is in talks to acquire Chrysler Financial from Cerberus Capital Management, according to
multiple press reports. The deal could be valued at upwards of $7 billion, with Cerberus possibly retaining
certain assets. www.tdbank.com

Other Deals
Fortune Brands (NYSE: FO) said that it will split the company into three independent units, just
two months after hedge fund Pershing Square Capital Management acquired an 11% ownership
stake. Fortune will spin off its home products unit to shareholders, retain its liquor business and
either sell or spin off its golf operation.
Johnson & Johnson has offered to acquire the remaining 82.1% stake of Dutch biotech
company Crucell, for 24.75 per share (58% premium to closing price on Sept. 16, when J&J
said it planned to buy the rest of Crucell).
Obrascon Huarte Lain SA has acquired a 50.1% stake in Judlau Contracting Inc., a
provider of heavy construction services in the New York City metropolitan area. The deal is
valued at $72.5 million in cash, plus possible earnouts. Sperry, Mitchell & Co. advised Judlau on
the deal. www.judlau.com
THT Heat Transfer Technology Inc. (Nasdaq: THTI), a provider of heat exchangers and heat
exchange solutions in China's cleantech industry, has raised $14.3 million in equity funding at a
pre-money valuation of $51.2 million. Infinity Group led the round, and was joined by MC
Capital and Zhejiang Jinqiao. www.tht.com

Firms & Funds

Hony Capital, a Chinese private equity firm, has planning to raise the equivalent of $1.5 billion for its
second yuan-denominated fund. www.honycapital.com
TPG Capital has made a final offer to acquire the real estate investment unit of ING Groep NV, according
to Bloomberg. Other final bidders include CB Richard Ellis Group Inc. and Jones Lang LaSalle Inc. KKR
and Vornado Realty Trust have dropped out. www.ing.com

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Moving In, Up and On

Liddy Carter has been named executive director of the Connecticut Venture Group, an industry trade
group. She is the former president of Resource Recovery Systems, and also served as CFO of NetKey.
www.ct-venture.org
Clyde Neu has joined Flywheel Ventures as a Montana-based venture partner. He currently serves as
chair of three Montana companies, including Flywheel portfolio company New West, and is president of
consultancy Eric Management Group. www.flywheelventures.com
Ken Spain has joined the Private Equity Growth Capital Council as vice president of public affairs and
communications. He previously was communications director for the National Republican Congressional
Committee. www.pegcc.org

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