Case Blog

Last week, as I flew west to Los Angeles, I settled in to catch up on my magazine reading. I had with me the most recent issues of BusinessWeek, Forbes, Fortune and Sports Illustrated. I am a longtime subscriber to all of them and still look forward to a block of uninterrupted time when I can read them cover to cover.  I found the current issue of Fortune of particular interest, as it ranked the largest private equity firms and had an up-to-date profile on each of those that made the cut. The lead article and a very flattering profile were on Jonathan Nelson, cofounder of Providence Equity. I have a high regard for Providence Equity and their focused approach to Media and Telecommunications buyouts. They have clearly been one of the most successful private equity firms over the past several years. Stephanie Mehta’s profile was insightful and quite flattering to Nelson and his partners. She focused on the record-breaking $51B buyout of BCE, the parent company of Bell Canada.  Providence partnered with the Ontario Teachers’ Pension Fund and Madison Dearborn Partners on this deal.

After reading the entire issue, I went back to the cover shot of Jonathan Nelson and all of a sudden the SI Jinx crossed my mind. For those of you who have not followed the SI Jinx, it is the phenomenon that simply appearing on the cover of Sports Illustrated with a flattering profile very consistently leads to a heart-breaking loss. The most recent SI Jinx that comes to mind is the Patriots’ and Bill Belichick’s loss to the Giants after being lionized by Sports Illustrated as the team of destiny that would go undefeated right through the Super Bowl to finish 19-0 and ended up 18-1.  Two days later the story broke that the banks that had agreed to fund the Bell Canada deal, Citigroup, Deutsche Bank and Royal Bank of Scotland, wanted to renegotiate  at a lower price to remove the risk they now saw in the current market environment.

Has Fortune now joined its Time Warner sibling Sports Illustrated in the cover jinx? Will CEOs start to resist cover stories in the same way many athletes do today with SI?

I hope those of you who love golf got to see Phil Mickelson’s amazing birdie on the 18th hole this past Sunday during the Colonial, in Fort Worth, Texas.  After launching a drive into the trees and rough on the left Michelson was left with an impossible shot. I sat there and said to myself, this is very reminiscent of the U.S. Open at Winged Foot, his driver has failed him, again.  He then proceeded to loft a wedge shot from 140 yards out onto the green, under one tree and over another. And with a friendly bounce the ball stopped less than 9 feet from the hole. He went on to sink the putt for a birdie and beat Rod Pampling by a stroke! Pampling was heard to remark that this is what the #2 players in the world do.  With Phil in fine form and with Tiger Woods returning from knee surgery, the U.S. Open at Torrey Pines should be an outstanding event.

It was not that long ago that all the large, well-known private equity firms in the United States and Europe were focused on the largest deals they could find. I remember meeting with many of them as I was deciding on what I wanted to do in my next chapter after Reed Business, and the question for many of them was how large were the deals I wanted to do or how large an equity check they could write.

After having spent many years in the B2B global markets, I had a clear understanding that most of the transactions took place in the middle market.  I placed the transaction values in a range of $50M-$500M.  This played a large part in my decision to partner with Austin Ventures to start Case Interactive Media.  As the credit crunch has continued, I have been surprised at how many large private equity firms are redefining themselves as having a middle market focus.

I read recently that Tony James, Blackstone’s president, defined their core to be the middle market. I was surprised at first to read this, but upon reflection it became clear that the middle market definition is being expanded to include deals up to $2.5B, which is still much smaller than we were seeing during the spring of ‘07 when covenant light deals were in vogue.  In some ways it feels like the Triple A minor league teams are now playing part of the season against the major league teams.

The good news in all of this is that I see the market window staying open for deal flow with a very strong second half of this year. Clearly the Reed Business transaction will be a major one in the second half, and I believe that we will see more deals along the lines of CBS acquiring CNet.  The activist funds, Jana and Sandell, got their desired outcome and CNet gained a parent. The larger media companies have strong balance sheets that will allow them to acquire digital properties to assuage the concern of investors that the media companies’ core revenue streams will be marginalized over time by the Internet.

We will get to watch the next round of the battle between Microsoft vs. Yahoo unfold over the next several weeks. I must admit that I find it somewhat strange to find Carl Ichan and now Boone Pickens in the middle of the fray! I do admire that both of them are still keeping score and have not retired to the sidelines.  I would love to hear their thoughts on Vista and search marketing! The ending to this story should unfold shortly.

Last week we saw several individuals and corporations declare victory. After Microsoft’s (MSFT) CEO Steve Ballmer decided not to go hostile and not to raise his $31 bid for Yahoo (YHOO) beyond $33, he walked away and said that Microsoft’s current online strategy was fine and that it would just take longer to offer a real challenge to Google (GOOG) without Yahoo. Then on the following Monday, with Yahoo’s shares dropping more than $4 but not as far as some predicted, Jerry Yang, Yahoo’s co-founder and CEO, weighed in on how he really was open to a deal, if only Microsoft’s offer realized the real value of Yahoo. Shortly thereafter, he and his independent directors were upbraided by significant shareholders, such as legendary media investor Gordon Crawford of Capital Research, for walking away from the only offer on the table and one that carried a significant premium to where the shares had been trading prior to the offer. I wrote in the blog “Corporate Culture” back in February, “As innovation continues apace in The Valley, this battle starts to feel like Microsoft and Yahoo are fighting yesterday’s war.” Now that the battle is over and victory has been declared by both sides, it still feels like both companies were focused on the past and that no one seems to understand either of their digital visions.

Then on Tuesday evening, we saw Senator Hillary Clinton declare victory in Indiana, even though every major network said it was too early to call. In declaring victory she vowed to fight on through the last primary, and if you listened to the nuances in her speech you could envision a fight at the Democratic convention in August. Later that evening, Senator Barack Obama declared victory in North Carolina, but stopped short of claiming he was the nominee. We woke up on Wednesday to the political pundits weighing in. Tim Russert of NBC showed us on a small white board how there was no mathematical way Senator Clinton could win the nomination unless another event like Reverend Jeremiah Wright’s press tour was to take place. Then on Thursday, Senator Obama realized that it was time for a victory lap through the House of Representatives, and that the Democratic nomination for President was clearly within his grasp.

Why is it that everyone wants to declare victory, even when it appears that they are on the losing side? This phenomenon is particularly true in business and politics, but less so in sports where we have overtime periods. Perhaps the Democrats should have declared sudden-death overtime after Super Tuesday and lined up behind Senator Obama, as the Republicans did behind Senator John McCain?

Our West Coast renovations are completed and we are looking forward to a mid-June wedding in Blackhawk. In preparation for the wedding, I was fortunate to join my son Jordan’s bachelor weekend with he and his groomsmen golfing at Bandon Dunes. Bandon Dunes is on the coast of Oregon, and I highly recommend it if you are looking to experience golf as it was once played in Scotland, its ancestral home. There is wind, rain and pot bunkers. There are no carts and the only activity other than meals is golf. We had a great time and no one declared victory!