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Buyout Buccaneer

Buyout Buccaneer
Phyllis Berman, Forbes Magazine, 07.09.01

It's supposedly next to impossible to do leveraged buyouts of technology
companies, but this nobody made a quick $1 billion doing just that.
Williams Communications Group surprised no one in announcing last
January that it was unloading a moneylosing division that designs data
and voice communication systems for corporations. "It was a monkey on
their back," concluded Andrew Hamerling of Banc of America Securities.

There was one surprise about the deal, however, and that was the buyer.
It was one Tom T. Gores, 36, of Los Angeles. Who is he?

Gores' Platinum Equity is all but unknown to the investment banking
community back East. It will become well known, though. From a standing
start in 1995 Platinum has done 30 buyouts, amassing a portfolio of
companies with a combined 15,000 employees and $2.5 billion in likely
revenues for 2001. To get there in that short time Tom Gores has broken
all the rules. For one, he specializes in the tech sector, an area
thought unsuitable for leveraged deals that depend on steady cash flows.
For another, unlike Kohlberg Kravis Roberts and its ilk, he has never
raised a penny of equity from pension funds or other institutions. Gores
uses only his own money as equity and leverages against it.

Weirdest of all is how Gores gets properties like the Williams
subsidiary to bid on: by cold-calling big companies, asking if they have
some division they'd like to get rid of. He has six people working the
phone all day long, as if Platinum were some vendor of penny stocks or
vacation time-shares.

Let the establishment types look down their noses, but Tom Gores is
cleaning up. As Gores' private fiefdom, Platinum publishes no financial
figures, but just one of his operating companies is easily worth $1
billion. How rich he really is we can't say. He has sold six businesses
for a total of $160 million, but he hasn't taken a single company
public.

Pretty impressive results for someone who has been out of the field of
vision of most Wall Streeters. The lack of visibility is not entirely
bad for Gores, since it makes his niche far less crowded than the rest
of the LBO business, where a flood of new players in the past decade has
depressed returns.

If you have never heard of Tom Gores, you might nonetheless know
something about his brother, Alec, 48, who runs a rival buyout firm
called Gores Technology Group. Gores Technology popped into view when it
acquired the remains of Learning Co., Mattel's disastrous foray into
educational software (Forbes, Nov. 13, 2000). More recently Alec Gores
has gotten some press for taking on Hewlett-Packard's VeriFone division.


The talented Gores family, of Greek heritage, immigrated to the U.S.
from Israel when Tom was 5. Tom and Alec's father ran grocery stores
outside Flint, Mich. Soon after Tom graduated from Michigan State, Alec
backed him in a company called Ventech, which sold software to
lumberyards. Tom marketed the software and his girlfriend, Holly
Murdock, installed it. The business was a bust, but Tom learned
something valuable from the experience: If you want to make money in
computers, get buyers hooked on whatever system you are selling. Find
some way to collect a perennial stream of revenues from those
customers--as Microsoft does by selling upgrades, or IBM by servicing a
legacy of mainframes, or Oracle by leasing its databases.

For a decade Alec and Tom were loosely associated in a variety of
businesses, and Tom ended up for a time at Gores Technology. In 1995 he
left to open Platinum, and he married Holly. (They have two kids.) Did
Tom and Alec have a falling-out? Tom's only explanation: "Our styles
differ."

They do indeed, though the brothers sometimes look at the same
properties. Alec buys outfits with other equity partners, puts little
money down and often flips them quickly. Tom has hung on to all but a
handful of Platinum's acquisitions, integrating them into several
operating companies. Platinum Equity, then, resembles not so much a KKR
buyout fund as a miniature Berkshire Hathaway, the portfolio run by
Warren Buffett.

Buffett is famously averse to technology because, he says, he doesn't
understand it. LBO firms stay away for another reason: Tech companies
are not usually generators of cash. They cannot support the debt usually
used to finance a buyout. There's an exception, though: Tech companies
that spend minimally on new products and yet have legacy customers that
pay for something, like service.

In 1996 Platinum bought Foresight Software, which had a base of
customers using its software to run call-and-repair centers. Having sunk
a million dollars into a system, a Foresight customer would be loath to
switch to a rival product. Charging that customer for upgrading the
software to reduce the length of customer calls, for example, makes a
tech company that generates cash from operations.


Gores applied the same logic to larger and more complex acquisitions. In
1998 he bought the networking operations of Racal Electronics, on which
Racal had lost $300 million the previous year. Gores paid $12.5 million
in cash for the business, giving Racal a ten-year note for the $35
million balance of the purchase price. Under Gores the Racal sub became
Milgo Solutions, which de-emphasized the production of
hardware--multiplexers, fiber-optic cabling and such--in which it was
competing with Cisco and Nortel Networks. Instead Milgo built up its
service business, advising clients before they built their data and
voice networks, as well as servicing those systems when they were up and
running. In six months the business turned profitable.
Buying things that could be made not just profitable but cash-positive
gave Gores a lot of flexibility. He could dispense with the usual back
door used by LBO dealsters, that a bid was contingent on financing. "I
made a couple of deals up front that created a lot of liquidity," brags
Gores. "I was amazed at how quickly we built up a war chest."

Gores bought the Williams Communications subsidiary for $400 million,
and combined it with Milgo to create a company called Nextira. Nextira
designs and services voice and data communication networks. It will take
in $1.45 billion of revenue this year, predicts Gores. With only $150
million in debt, and with a staff pared to 5,500 from 6,500 in the
predecessor businesses, it will make a profit before goodwill
amortization, he says.

Nextira competes head-on with Equant, a publicly traded company being
acquired by France Telecom. Equant has $1.6 billion in sales, $350
million in debt and $111 million in losses over the last 12 months.
Equant's market cap: $5 billion. If Nextira is worth even a fourth as
much, then Tom Gores is a billionaire just with that holding.

Gores has no institutional investors to impress and therefore scant use
for recruiters at fancy business schools. He hires people he knows.
Chief of acquisitions is Johnny O. Lopez, who had been in sales at
Ventech. Gores persuaded another Ventech alumnus, John Diggins, to leave
a comfortable job at Dow Jones to run first Foresight and then marketing
for all of Platinum. Treasurer of Platinum is Robert Joubran; teenage
Tom had worked at Joubran's father's grocery. This crew is fiercely
loyal to Gores, and, as one investment banker says, "They all work like
dogs."

They are sufficiently close-knit that they can be all over the map.
Gores, Lopez and the cold callers are in Los Angeles. Diggins operates
out of an office in New Jersey. The corporate data center, purchased for
a song from a dying e-commerce operation, is in Atlanta. Chief Operating
Officer Philip Norment is on the road most of the year, but his home
base is Boston.

In one way Tom Gores' business is getting easier. He has done enough
deals to be taken a lot more seriously by potential sellers now than he
was at the outset. On the other hand, success breeds competition. Larger
and better-known players are crowding into tech buyouts, including
Francisco Partners, a fund run by Robertson, Stephens & Company founder
Sanford Robertson.

Gores has advantages. Give him some time, and he could be a serious
competitor to Henry Kravis.