Anatomy of a Deal

Like many business deals, this one started on a golf course. Last January, Doug Mitman and John Beagle, founders and managing directors of the Milwaukee-based investment banking firm Grace Matthews Inc., and their mutual friend V. Miller Newton, a software industry executive who served previously as chief executive officer of Monster Worldwide Inc., took their annual golf trip to Las Vegas.

While playing the links and having dinner, they talked about Newton’s future. At the time, he was CEO of Netkey Inc., an East Coast management software development firm. Netkey was in the process of a sale, and Newton was thinking about his next endeavor.

 “We knew that he was close to selling Netkey,” Beagle said. “And we all thought it would be great to get him back to the Midwest.”

A few weeks after the trip, the conversation between the friends turned into a viable plan, after Beagle had lunch with Tim Kennedy, former president and chief operating officer of PKWare Inc. Beagle learned that PKWare, a Milwaukee-based compression and encryption software firm, was up for sale.

By August, their plan paid off when PKWare was purchased by the Canadian private equity firm Novacap Technologies and the Chicago finance firm Maranon Capital LP.

Newton was named the company’s CEO.

With its new ownership group and a leader with significant experience in building companies in the technology field, PKWare is positioned for significant growth. Newton and his management team predict the company will double its revenues in the next four years.

“I’ve done the math and science here – looking at alternative distribution systems and packaging our solutions in vertical markets, in a 3½ – to four-year period, when there is an 18-percent annual compound growth rate in the security markets – I think we can do better than average market growth,” Newton said.

Personal connections

There are deep personal and business connections between Newton, Beagle and Mitman, and also between Grace Matthews and PKWare.

Beagle and Newton got to know each other in the early 1990s, when Netwon’s family moved to Whitefish Bay. Beagle’s wife, Gwyn, helped welcome Newton’s family to the village and became close friends with Newton’s wife, Cheri.

Within a short time, Newton, Beagle and Mitman were playing golf together on a regular basis. Beagle and Newton’s families grew close – so much so that John and Gwyn Beagle are the godparents of Newton’s children.

In the late 1990s, Newton’s family moved to New York when he was helping take TMP Worldwide, which later became Monster Worldwide Inc., public. Netwon went on to leadership positions in companies such as Netkey Inc. and Lavastorm Technologies Inc.

“John has been on a mission to get me back here since we left,” Newton said. “We loved it here.”

Grace Matthews also has deep connections with PKWare.

PKWare was started in 1986 by Phil Katz, a software engineer and inventor of the compression technology. Katz passed away in early 2000, and at the time, several of PKWare’s managers asked Grace Matthews to help find the company an investor to purchase it.

The firm introduced George Haddix, an experienced software executive from Nebraska, to the company, which ultimately led to his purchase of PKWare.

“We had a 10-hour meeting between George and (PKWare’s chief scientist), and they had a Vulcan mind-meld between them,” Mitman said. “George said, ‘I will not leave Milwaukee until I have this thing,’ and started negotiating with Katz’s estate lawyer.”

Grace Matthews also helped PKWare acquire Ascent Solutions Inc., an Ohio-based software firm, in 2002.

Haddix declined to comment for this story.

When Haddix bought PKWare in 2001, the company had about $2 million in annual revenue. By the end of 2008, it had roughly $25 million in sales.

Opportunity knocks

Last summer, Haddix decided to sell the firm and retained a prominent Silicon Valley investment banking firm to bring it to market.

But the financial collapse of late 2008 led Haddix to take PKWare off the market.

“The best laid plans sometimes don’t work out because the world changes,” said Tom Myers, an attorney with Reinhart Boerner Van Deuren S.C., who served as general counsel to PKWare under Haddix’s ownership. “When we went to market, there was still a robust economy and M&A market.”

When Beagle had lunch with Kennedy a few weeks after the Las Vegas trip with Mitman and Newton, the pieces fell into place.

“That was our Eureka! moment,” Beagle said. “We knew Miller would be perfect for this.”

“We said, ‘We can do this,'” Mitman said. “We knew the price that George would want and approached him.”

Grace Matthews arranged a meeting between Haddix and Newton, which turned into a full day of talks and negotiations, and ultimately continued into dinner. By the end of dinner, Haddix was convinced that Newton was the right person to lead PKWare in the future.

However, there was a lot of work that needed to be done before they could proceed, Beagle said.

“We had a CEO with another job at the time and a signed letter of intent to buy the company,” Beagle said.

While there was work to do, Grace Matthews believed it had a great story to take to potential buyers.

With his previous experience in the software industry, Newton knew what PKWare sold and what its reputation was in the market. He could also see a huge growth opportunity.

“(The software security market) was a $40 billion market in 2008 and it’s expected to grow to $80 billion by 2012. It’s a hot market in spite of the recession,” he said. “Our approach to security is a fairly new concept. We’re an early technology investor in that space. And we are a big, well-known brand in the enterprise software world. Ninety of the Fortune 100 companies are PKWare customers today, and there is a big opportunity to sell our security offering to companies that are using our compression.”

The right partners

Last summer, seven different private equity groups came to Milwaukee for in-person meetings with Grace Matthews’ staff, Newton and other PKWare management. While one buyer emerged from that group, it was interested in moving the company to California’s Silicon Valley.

“No one wanted that,” Mitman said. “George had been incredibly generous with his people (at PKWare), and that wasn’t what he wanted to do.”

Novacap Technologies, the eventual buyer of PKWare, learned about the deal through a chance phone conversation. Early this summer, Mitman was working through a separate transaction with the firm. His contact there asked him what else he was working on, and when Mitman mentioned that he was bringing a Milwaukee software firm to market, that contact put Pierre McMaster, a general partner with the firm, on the phone.

“Doug was telling me that it was a compression and encryption company, and I know there are only a few in the world like that,” McMaster said. “I knew it was in Milwaukee, so it had to be PKWare. The brand name rang a bell, and for IT people, it’s a recognized brand. That made it very interesting (to us).”

A few weeks later, after receiving detailed written materials about PKWare, McMaster traveled to Milwaukee for in-person meetings with Grace Matthews and the company.

“He decides there was no way he (McMaster) was going to lose this deal,” Mitman said.

McMaster spent a significant amount of time in Milwaukee last summer and early fall while negotiations continued and the deal was closed.

“Especially with the closing, I stayed there until the deal was closed,” he said. “I lived in Milwaukee for probably three or four weeks.”

Finding available financing for the transaction was equally challenging, Mitman said, because most banks are no longer financing buyouts, even for healthy, growing companies such as PKWare.

However, Grace Matthews had a pre-existing relationship with Demian Kircher, managing director with Chicago-based Maranon Capital, which ultimately financed the purchase by Novacap. Maranon Capital provides specialty financing to middle market privately held businesses and offers senior debt and mezzanine financing, as well as equity co-investing. The firm provided all three types of debt with the PKWare transaction and invested 20 percent of the equity in the deal, Kircher said.

“In doing all of the debt and a chunk of the equity, we wrote the largest check to get the deal done,” he said. “We like the existing management team along with Miller (Newton), who is new to the deal but not new to running businesses. We hope that this is a long-term and lasting relationship.”

Novacap Technologies views its investment in PKWare similarly. While many U.S.-based large private equity firms have a reputation and track record of buying, growing and selling their portfolio companies in a five- to eight-year time frame, the Canadian firm takes a longer approach, McMaster said.

“Our average (time holding a company) is more than eight years,” McMaster said. “For some, it’s five years, for some it’s 15 years. We like the company’s position in the market and customer base. It’s already selling to Fortune 300 companies and they have interesting traction in the market. They could be a platform for more acquisition in the security space.”

Although he sold PKWare in the transaction, Haddix also has reportedly re-invested a small portion of his proceedings in the company, allowing him to have a limited continued involvement there.

Grace Matthews also became a small equity partner in PKWare through Garrett Investments, a holding company associated with the firm.

“We also took a stake in the original PKWare (sale), and that has been phenomenal,” Mitman said. “We’ve done that five or six times over the years, and they’re not always successful. But we know Miller and wanted to participate with the growth we believe will be coming.”

The sale to private equity investors that want to grow the company in Milwaukee represents an ideal deal, Myers said.

“I’m a big fan of Milwaukee, and as a big fan of the city and having a tech company remain here because it’s been purchased by a company that appears to be planning to keep it here is a real positive for Milwaukee,” Myers said.

PKWare Inc.

648 N. Plankinton Ave., Suite 220, Milwaukee

Industry: Compression and encryption software development

Number of employees: 85, including 55 in Milwaukee

Value proposition: As the inventor of compression software technology, PKWare has a well-respected reputation in the software industry. Its PKZIP software not only created the market for compression, it has become the industry standard and is used by most large commercial clients who need to compress and store large amounts of data. The company also sells a product called SecureZIP, which combines its compression software with encryption, allowing clients such as banks, hospitals and governmental agencies to transmit large and sensitive files securely.

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