| THE WALL STREET JOURNAL
NEW YORK -(Dow Jones)- When Parthenon Capital acquired the Total eMed unit from online health record company Medscape Inc. (MDLI) in August, the Boston private equity firm paid about $6 million in cash.
The price tag had been quite different just 15 months earlier when the parent company that became Medscape had taken over the Nashville unit: about $350 million in stock.
That's the kind of bargains Parthenon has found itself looking at in recent months. "We see a buying opportunity - good companies that have fallen out of favor with Wall Street," said Ernest Jacquet, Parthenon's managing partner. This does not mean that the Boston firm sets out to buy and hold publicly-traded companies or their units - since that is neither its strong suit nor strategy.
In fact, Parthenon, which was founded in 1998 to pursue both leveraged buyout and venture capital deals, primarily targets privately-held companies in potentially profitable but neglected fields that it can acquire and help grow into the No. 1 or No. 2 in their niches. But the firm's mandate is flexible enough for it to also look at public companies it can acquire, take private and expand - much like what many leveraged buyout shops once did in the late 1980s.
"It was going to take at least two years to develop Total eMed into a leading electronic medical records company, and that's what attracted Medscape in the first place," Jacquet said. But then Medscape, like many online companies, saw its stock price plummet from more than $50 a share in 2000 to less than $1, and was under tremendous pressure to cut losses. "Total eMed was burning cash, and the fundamental business required an infusion of cash - and that's what we provided."
Keeping Focus Away From Large Deals
Because larger deals in recent years have attracted the attention of too many blue-chip LBO firms fighting over fewer, high-profile targets, Parthenon is training its crosshairs on small to mid-market companies, which it believes offers greater potential for profit.
It is an approach the firm's investors seem to approve of. Parthenon last year set out to raise $600 million for its second fund, and ended up with $750 million last fall. (The fund officially closed Sept. 10, with many of the gathered investors scheduled to fly out of Boston on Sept. 11; everyone is OK). Seventy-seven of the 80 investors from its 1998 first fund signed on again for the follow-up (one of the three dropouts had been acquired). This despite the fact that the first fund, whose $350 million was quickly invested in 14 deals over 20 months, had cashed out from just two deals - leaving the debut fund's returns in one big question mark.
Part of Parthenon's appeal, according to some investors and executives at acquired companies, is the strong consulting experience the firm brings to the companies. Like Bain Capital (X.BCI), where Jacquet was once a principal, the 35-person Parthenon Capital is affiliated with The Parthenon Group, a strategic consulting firm with 170 people in its Boston, San Francisco and London offices.
"We're actually seeing more deals now because companies are approaching us - their attitude seems to be, if we're going to sell in exchange for equity capital, we might as well go with someone who's bringing more than just cash to the table," said Jacquet, 54, who was once a Navy diver before he headed to Stanford Business School and into the world of finance.
In the case of Pharmedica Communications, Parthenon first identified a market it felt was underserved: the continuing education of physicians. It then worked with one of the investors from its fund, Sperry Mitchell & Co., a boutique investment bank that specializes in selling small private companies, to find Pharmedica. The Killingworth, Conn.-based Pharmedica was founded in 1989 by Larry Timmerman and his artist wife in a room over their garage; 10 years later it had grown into a continuing medical education firm with 200 employees. Parthenon acquired the closely-held company through a recapitalization in December.
In the case of Wolverine Procter & Schwartz, a supplier of industrial ovens and dryers, Parthenon did much of the negotiation directly with the bank. "It was a classic case of the over-levered mid-market company," Jacquet said. So Parthenon last week acquired the company through a recapitalization, chiefly by providing equity capital to completely de-lever the balance sheet.
That took the number of deals chalked up by the three-month old second fund to five; Parthenon expects to invest its $750 million over 25 transactions - to keep the size of each deal small.
Consolidation Opportunity
Some of those deals required a bit of mixing and matching. When Parthenon first acquired Wilmar Industries, a specialty distributor of plumbing and maintenance products, the once-public Moorestown, N.J., company had seen its stock price slip from more than $30 a share at one time to below $8. After buying Wilmar and taking it private, Parthenon added two other acquisitions, including the once publicly-held Barnett Inc., a national direct marketer of plumbing, electrical and hardware products, in 2000.
"It's a perfect time, in a soft market, to buy up your competitors," Jacquet said. Parthenon's strategy here was to acquire competitors to create a national chain, one capable of reaching 70% of the population with same-day delivery. The result? The newly-consolidated and freshly-renamed company Interline, whose pretax profits for fiscal 2002 is expected to exceed $100 million.
To be sure, snapping up small but promising companies at what seem like good prices - something buyout firms have long aimed to do - may not automatically translate into winning returns for the firm. But with the stock-market correction, and with Parthenon's ability to offer consulting, the lower price tags can at least lessen the pressure and improve the odds.
In order to avoid relying on the initial public offering market, whose fortunes can fluctuate with the whims of fickle investors, Parthenon plans to exit most of its current investments through sales to larger corporate buyers.
- Kopin Tan, Dow Jones Newswires; 201-938-2202; kopin.tan@dowjones.com
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