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From the PartnershipIs it too soon to hope for improvement in the economy? Maybe so, but it's not too soon for our companies to begin planning how they want to emerge from the recession. A big part of that planning involves thinking strategically about how to grow market share. We are fortunate in having the resources to have helped two of our companies grow share through strategic acquisitions. In this issue of our newsletter, we hear from Chris Fedde, the COO of SafeNet, about their recent acquisition of Aladdin Systems, an Israeli security company with complementary products. We also note the acquisition of TVN Entertainment by Avail Media, a transaction which leaves the resultant company as a market leader. General Partner Scott Frederick offers some thoughts on selling venture-backed companies through M&A transactions, and Valhalla Controller Danielle Brogan writes about M&A from a research and analytic perpsective. As always, we welcome your comments and questions. Please email to editor@valhallapartners.com. Valhalla CEOs: Chris Fedde You recently managed SafeNet through the acquisition of Aladdin, an Israeli security company. What convinced you and the team that the acquisition was in SafeNet’s interest in a tough economic climate?The tough economic climate creates two unique opportunities for us, one offensive and one defensive. First, within our company are growth engines that can be accelerated by acquiring high tech companies that are in financial distress. In other words finding great bargains that can fuel future growth. These are the offensive moves. Secondly, we have to protect the existing run-rate business against the effects of the economy. The defensive moves here are related to scale -- adding size through acquisition that can be highly synergistic and give us a broader base from which to reduce expenses. The Aladdin acquisition was in this category. If the two companies had to cope with the adverse economic effects separately we would have each taken similar actions to reduce expenses, but taken against a smaller business base that could have jeopardized the underlying business. In reaching this goal, synergies are not a side benefit, they are the point of the deal. What were some of the challenges of consummating the acquisition? You’ve been through a number of these exercises in your history. What was unique (or what was the new learning) about this one?No matter what anyone says, chemistry will make or break an integration. And I mean chemistry, not culture -- Aladdin was our first close encounter with an Israeli company and the culture is new to us and very different. Learning about those differences is still on the job training for both of us. But the people clicked with each other. So in short order everyone wanted it to work, and once that's achieved I know it will succeed. This is a great question because I get to use terms like "chemistry" and "people clicked" which I can't define. But we've learned to predict when it will be there and how to put it to work as fast as possible after acquisition. What emerging trends in the security space are interesting to the new merged company? What challenges do you think your government and commercial customers will face going forwards?Security vulnerabilities are the most acute at the leading edges of technology trends. Today that is the delivery of services from the cloud. It comes in many incarnations -- SaaS, SoA, cloud computing -- and they all require the movement of sensitive and valuable data out of the data owners' control. These trends are irreversible and the security vulnerabilities are very real so that's where SafeNet's new opportunities are. The problem is the same for the government and commercial customers, the difference is the tolerance for risk. The government has information that cannot be put in jeopardy and, in my opinion, that will drive them to owning the clouds that deliver the services so that they can implement adequate security controls. Commercially, the clouds will expand quickly due to the economics of using them, but the pace at which security is implemented will be driven by the pace of actual breaches. Beware of that, my fellow business leaders. What advice would you give to CEOs facing similar acquisition opportunities? What do you wish you had known before you started?The starting positions of two companies discussing an M&A these days will be amazingly far apart. Wild valuation fluctuations, big sunk investments and inflated self-assessments lead to agonizingly long negotiations while today's reality sinks in. I haven't discovered any way of circumventing this, but my advice is not to interpret it as a threat to the deal. Suffer through because it's worth it. I didn't like this lesson -- I value impatience. But in today's M&A environment patience is rewarded. Partners' Viewpoint: Scott Frederick on M&A
 In terms of finding the best exits for our companies today, we have to face up to a situation where the IPO window cannot be relied upon, so the most likely source of liquidity today is M&A activity. If you divide M&A buyers into financial and strategic buyers, you have to prefer a good strategic acquisition. A financial buyer is likely to pay the same kinds of multiples on revenues that a venture investor will pay when investing in the first place. As a result, the only source of returns will be growth in the company’s underlying business. In a strategic sale, however, the right buyer will recognize the longer-term value and is likely to pay a premium beyond company growth, sometimes a substantial one. So the question then becomes, how do you find a strategic buyer? There is popular adage in the business that "companies are bought and not sold." As such, it is widely believed that you need to plan for success as an independent company and effectively let the chips fall where they may. While we certainly agree that companies need to plan for success, we don’t believe in just letting chips fall where they may. Good strategic buyers rarely just show up with open checkbooks. It is our experience that these relationships can be (and often need to be) cultivated. More often than not, the best acquisition targets are companies that the strategic acquirer has worked with successfully in the past. So in this respect, we believe that some of the best exits in the venture business come about when companies are actively marketed before being sold. This means that companies need to understand their ecosystem, know which buyers are stockpiling cash, what they are looking for, and then, perhaps most importantly, look for ways to build a history of successfully working together. And in a perfect world, they would do so with more than one strategic partner, as it is always beneficial to be able to bring multiple buyers into play. M&A: Danielle Brogan, Valhalla Partners Controller Over the past several quarters, the M&A and IPO markets have experienced a significant downturn making it difficult for venture capital firms to exit portfolio company investments. As published by the National Venture Capital Association and Thompson Reuters, only 56 venture-backed M&A deals were reported in the first quarter 2009, which represents a 47% decrease from M&A activity in the same period in 2008. There were no venture-backed IPOs during the first quarter 2009, which represents the second quarter in a row with no venture-backed IPO activity and the first time this trend has occurred since this data has been recorded. With such a dismal exit environment, many venture capitalists are looking to hold on to portfolio companies longer and wait for market conditions to improve rather than risk accepting a lower return, a real issue in this environment. In Q1 2009, for example, 54% of the 13 M&A transactions with disclosed values sold for less than the total venture investment in the companies, vs. only 33% in that category in Q1 2008. Additionally, only 23% of the 2009 transactions provided a 4x to 10x return on venture investments vs. 37% in 2008. As venture capitalists wait for the exit environment to improve, many are looking to strengthen existing portfolio companies with the intention of maximizing the return once they can be sold. In May 2009, the Association for Corporate Growth (ACG) and Thompson Reuters released their mid-year 2009 survey, which reported that 68% of all private equity professionals are spending more time working with their portfolio companies. Of these individuals, 48% are looking for add-on acquisitions to grow their companies. Valuations have declined making it more attractive and cost effective to acquire additional technologies and market share in order to improve a company’s market position. Valhalla Partners has found itself in the fortunate position of having available capital and portfolio companies who have identified companies that, once acquired, add significant value. In March 2009, SafeNet acquired Aladdin Knowledge Systems, an acquisition that has significantly extended SafeNet’s presence in the Software Rights Management and Authentication Industries. In June 2009, Avail Media, a provider of linear content, purchased TVN Entertainment Corporation, which extends the company’s offerings to include on demand video services. The combined company represents the only end-to-end solution for content owners and serviced providers. Both of these acquisitions add value to these portfolio companies and position them well for a future exit. Portfolio News
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