Wall Street West – Market Turmoil Is Having Little Impact on This Deal

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Despite the market gyrations of the past two weeks which some say put the chill on a number of venture deals other financiers are shouting “Damn the torpedoes.”

Camarillo-based elabor.com is one such deal, according to Leib Orlanski, partner with the law firm of Kirkpatrick & Lockhardt in Beverly Hills (formerly Freshman, Marantz, Orlanski, Cooper & Klein).

Back in February, officials at elabor.com told Orlanski they wanted a second-round infusion of growth capital. On March 1, he called New York.

“Less than 24 hours after I called Lehman Bros., they had assembled a team and had them flown here,” said Orlanski. “They were here the next day. Within 48 hours, they had signed a term sheet (detailed letter of intent) to fund the deal.”

Within the month, elabor.com was injected with $12.5 million in cash from a venture team led by Lehman Bros., which included participation by West Los Angeles-based Brentwood Venture Capital, Brad Jones’ existing fund.

But that was back in March, and things have changed, at least if one is watching the Nasdaq.

Maybe so, but not for elabor.com, Orlanski insisted. “There is so much demand, we decided to take in another $7 million,” he said last week. “In the next two weeks we will decide which investors we let in. We’re picking the ones who offer the most strategic value to the company. This is now a nearly $20 million deal.”

In early stage venture deals, Nasdaq’s up and downs are not always too important, said Orlanski. “You are looking at whether the company has a viable business plan and can make money. You are not going to go public for a couple years anyway,” he said.

In a sustained downturn, valuations (the terms on which venture capitalists give their money) can change, said Orlanski, who has seen more than a few deals in his 30 years in the venture wars and called the elabor.com deal the fastest yet.

“It just shows when the clients and financiers want to get a deal done, the lawyers don’t have to get in the way,” he said. “This was Internet speed.”

The business focus of elabor.com is providing software to companies, generally those with 3,000 employees or more, to help manage and monitor labor and large projects. For instance, the construction of an oil well could be tracked using the company’s software, with labor hours, costs and timeliness continuously monitored, among many other details.

The firm recently shifted from installing software on client computers, to providing the software and services online at tremendous savings to customers. Providing software and services through the Web, as opposed to selling and installing complicated but rapidly obsolescing software is hot right now, Orlanski said.

PIPE Fitters

Always worth a gander is Roy Weitz’s fundalarm.com Web site, which monitors the mutual fund industry and recently looked at “PIPEs.” The acronym stands for “public issue of private equity.”

It seems that mutual funds are struggling to beat the averages. And that is important now in terms of marketing because even ordinary investors have become somewhat street-hip and want to invest in mutual funds that outperform market averages, not merely deliver good returns.

But, of course, beating the market is no easy feat. Indeed, some highly respected market theologians such as famed Burton Malkiel (author of the classic, “A Random Walk Down Wall Street”) contend that due to the “efficient market theory” and the inherent unpredictability of events (such as war, credit famine and fads), an investor can have the same chance of success by throwing darts at a board as hiring an expensive money manager.

That being the case, money managers are under greater pressure to show they are worth their salaries and nice offices. So, in a PIPE deal, mutual fund titans agree to buy large blocks of stock from a single company, but at a below-market price.

“In one recent PIPE deal involving shares of NPS Pharmaceuticals, four (mutual) funds… picked up shares at $12 each. At the time, NPS stock was selling for about $16 on the open market,” said Weitz.

In another recent PIPE deal, Janus (a mutual fund) picked up almost $1 billion of Healtheon/WebMD Inc. shares at about a 7 percent discount to market, said Weitz.

For issuers, a PIPE deal cuts underwriting costs and raises a slug of cash in a quick-step; for buyers, it’s a chance to buy at as much as a 25 percent discount to market.

There are risks, of course. Often companies wanting cash in a hurry are in a growth mode, which is great if they can sustain growth and reward shareholders. If they can’t, fund managers may find that they have a nice fat stake in a company that needed cash, used it up and diluted its shareholders in the process.

Overseas Relaxation?

Investors who are dizzy with the gyrating U.S. stock market may want to consider a mix of international bonds, if the performance of downtown Los Angeles money manager Payden & Rygel’s Emerging Market Bond Fund is any indicator.

In the 12 months ended in February, the fund rose 32 percent, buoyed by investor perceptions that credit risks have lessened. In 1998, of course, investors more or less fled from any IOUs not issued by Uncle Sam. In the flight, some good quality bonds got hammered, especially in markets such as South Korea, Central Europe and Mexico. “(But) there have been improving credit stories” through much of the Far East and Latin America, said Kristin Ceva, portfolio manager for the fund. “The trend now is for credit upgrades.”

That means the credit-rating agencies, such as Moody’s Investor Service and Standard & Poor’s, think IOU-issuers, both corporate and sovereign, are more likely to be able to pay back what they borrowed, with interest. When a bond is upgraded, it usually appreciates, all other things being equal.

But Latin America is nothing if not defined by dramatic cycles and political effervescence. Mexico, in several iterations over the last two decades, has been cast as a burgeoning economic power, only to slide repeatedly into economic sinks for years at a stretch.

Why take a chance?

Well, Moody’s is looking at Mexico sovereign debt with an eye for an upgrade, and Mexico’s IOUs are yielding 2.5 percent more than U.S. Treasuries, Ceva points out. The country’s budget is in good shape. The world’s economy is growing at 4 percent a year (good for Mexico exports), and commodity prices are rising all helpful to Mexico.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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