Last week, we learned that Intergraph Corporation agreed to be acquired by an investor group led by two investment firms, Hellman & Friedman LLC (H&F) and Texas Pacific Group (TPG) in a transaction valued at approximately $1.3 billion. On Wednesday afternoon, September 6th, Directions Media editors spoke with Intergraph executives, Reid French, executive vice president and chief operating officer, Peter Batty, chief technology officer, and Ian Hoffman, vice president of marketing, about the pending acquisition and to clarify some recent statements that have been made in the mainstream and trade press.
The one item that Intergraph could not comment on was the process of how Intergraph accepted the offer from these investors. Reid French explained that the information would have to be divulged to everyone (shareholders, press, etc.) at the same time. However, he did point to the proxy information
that can be found on the Intergraph website.
We started our conversation by asking for a clarification on a reference made on The Motley Fool
, a popular stock and investments website, that the purchase was a "management buyout" meaning that Intergraphs management was materially involved in the purchase of the company. Our understanding was that this was an "all cash" tender for the company. Reid explained that The Motley Fool
story was erroneous and later corrected.
wrote a story that indicated that it was a 'management buyout' and we actually indicated that that was not factually accurate. It was more appropriate to refer to it as a 'leveraged buyout' because ultimately management from a financial point of view did not participate or raise the funds in order to buy the company. It was led by TGP and H&F. So they actually retracted their story and republished it because they had their facts wrong."
"In terms of what you said
it is an all cash offer whereby TPG and H&F are purchasing the company. They are raising the capital in two manners: one is through their limited partners that are providing equity capital for them to invest. And the other is by raising debt in order to finance the acquisition. The best way to describe it is just like all of us in our own lives when we buy a house. We put both equity down to pay for the house as well as we take out a mortgage to buy the house. Its very similar where they issue debt and take on debt to buy the company and they are going to write very large equity checks in order to buy the company."
Just to be absolutely clear we asked French to confirm that the management team did not use any of their own resources or capital to buy into the company. French said, "To be specific on that, those discussions have not occurred yet. The purpose of the process and the way you run these so that there is no conflict of interest between the management team and ultimately the public shareholders is that the board of directors and the management team are directed in order to focus on the shareholders work which is to make sure that you get the highest and best price possible for the shareholders. So it is a true statement that there have been no discussions between ourselves and TPG or H&F relative to any co-investing or anything of that nature."
French also wanted to make certain that speculation about whether the company was acquired solely in order to break it into pieces was unfounded. "I know that there has been lots of discussion and weve read some of the stuff that you have reported on and we appreciate the coverage, but the house analogy is also pretty fair, which is just like it is atypical for someone to buy the house and to sell it six months later and make a profit, its typically the transaction fees associated with that outweigh any potential price gain that you got."
TPG and H&F are investors in such diverse entities as the NASDAQ, Sierra Logic, and DoubleClick so we asked how Intergraph fit into the mix and what the long term investment objectives may be. French said that, "These guys, their investment horizon is typically five to seven years period and so their investment thesis, at least in all of the discussions weve had with them, is not to buy the company, split it into two pieces, spin things off, sell this, sell that; thats really not why they bought into the company. Their investment thesis is they believe that those in SG&I and in PP&M that are significant growth opportunities and solid, underlying macro trends that will support good growth that will allow them over time to pay down debt and for the company to get larger such that it ultimately can be sold or taken public again at a higher valuation. And so back to the house analogy, the way that they make money is by paying down that mortgage through operating cash flow and by selling the house at high price some time later in the future. And whether thats selling to public investors again, which is in many cases is how they exit, or by selling it to another strategic player that could be an exit for them. But, I think if people think there is going to be some big break up, split up, sell off or whatever in six months time, they are going to be disappointed because I think thats highly unlikely."
There were also some other thoughts that the sale could have been related to Intergraphs outstanding patent infringement lawsuits, which have resulted in some extremely lucrative cash settlements to the company. French said that, There have been stories that came out in the popular press that said this has nothing to do with operating businesses; this was all about the patent portfolio. Im afraid to say thats just wrong. The reality is weve been quite open with public shareholders and with the media; the reality is that most of the major PC vendors that are out there that infringe, have already licensed. And so that doesnt take away from the fact that we have ongoing suits today with Toshiba and with NEC and Fujitsu Siemens in Europe, but those are on a much smaller scale than would be Dell, HP, Compaq, IBM, etc. and so that really isnt the rationale behind the acquisition."
We also asked the Intergraph team to explain another suggestion that the existing offer may not be the only one accepted or that other investors may be considered. Reid again pointed us to the proxy statements. The 8-K filed with the Securities and Exchange Commission on August 31st, the day the sale was made public provides details:
"The Company may terminate the Merger Agreement upon certain circumstances, including if its Board of Directors determines in good faith that it has received a superior proposal, and otherwise complies with certain terms of the Merger Agreement."
So whereas Mr. French thought it was highly unlikely that another offer would be considered, the possibility remains open.
Our sense from speaking with the executives was that management and staff were getting comfortable with the buyout and expected it to go forward with little interruption. Moreover, no management changes were expected in the near term and the focus in the coming months with be delivering promised products and services to customers. For now, and even through the change from public to private, for employees at Intergraph and their clients, it's business as usual.