Wall Street Adventure for Venture Capital Lawyers

NJBIZ, Oct 20, 2008 by Daks, Martin C

HADDONFIELD - The financial turbulence battering companies from Wall Street to Main Street has added private equity and venture capital deals to its list of victims, say lawyers who handle these complex transactions.

The market may be hurting right now, with fewer deals getting done, they add, but the current pain may help a long-term recovery.

"We're seeing a substantial slowdown, if not a complete standstill, in venture capital activity," says Deborah A. Hays, a partner with the Haddonfield law firm Archer & Greiner P.C., which focuses on venture deals and bankfunded transactions. 'Attorneys in Philadelphia and other cities also tell me they've seen a sharp drop-off in venture transactions."

The pullback has not hampered her firm though, Hays says.

"We have a diversified client base that encompasses mergers and acquisitions, litigation and other work, so we're not really hurting," she says. "Even so, we're conservative when it comes to estimating the revenue flow for the next fiscal year."

Companies with good fundamentals still can attract venture funding, she adds.

"Compared to the last few years, there may not be as much money out there," Hays says. "But companies that are realistic about their pricing can still find backing."

The flow of domestic venture funding may be crimped, but the relatively weak dollar presents buying opportunities for European venture funds, says Victor H. Boyajian, a partner in the Millburn office of Sonnenschein, Nath & Rosenthal LLP. He serves as national chair of the law firm's venture capital and emerging growth company group.

"Law firms with diversified practices can ride out this downturn," Boyajian says. "We represent major European and Korean buyers that have cash. The currency exchange is favorable for them, so the current turmoil means they can take advantage of good pricing opportunities."

Besides the cross-border transactions, Boyajian says he also is doing "a good number of mergers and acquisitions.

"The capital markets, in general, are not good for young companies that are going public, but later-stage companies may find an easier time ofit, especially if their revenue trends show traction," he says. "Venture capital providers are not really looking for concepts right now. Instead, they want to see a track record."

William P. Oberdorf, a LeClair Ryan partner in Newark, says he has not seen much of a slowdown in venture activity.

"The shrinking availability of credit may present an opportunity for venture funds," says Oberdorf, a shareholder in the firm's cor- porate group whose focus includes corporate, venture capital and securities matters. "Addi- tionally, a reduction in the valuation of many companies means VC funds may be able to strike deals with terms that are more advantageous than what they could previously get."

But the turbulent financial markets have curtailed private equity deals that often focus on later-stage or mature companies, says John D. Cromie, a partner with the Roseland office of Connell Foley LLP who chairs the firm's corporate law and transactions practice group.

"There's been a broad-based pullback in transactional deals involving private equity," he says. "People in general are adopting a more conservative approach in the face of a soft economy and the tight credit market. It means there is an additional level of challenge to get deals done."

Jitters in the financial market could scotch deals that already are underway, Cromie says.

"We're seeing some buyers and sellers scour the documents for escape clauses, even when they signed the deals months ago," he says. "They often focus on material adverse change, or MAC, clauses that may let them back out if there's been a significant change in the [selling] company's market position, or if the buyer is unable to get financing."

The current market troubles are likely to drive some far-reaching changes in the dealmaking process, Cromie says.

"After this shakes out and the economy stabilizes, I believe that the market [for venture and private equity activity] will bounce back," he says. "Butin the future, we're likely to see buy-sell deals at realistic values based on the true worth of the underlying assets, instead of the inflated valuations we've been seeing in recent years."

E-mail to mdaks@njbiz.com