David Bonderman, a founding partner of private equity firm TPG Capital, learned about investing while working for billionaire Robert Bass in Texas.
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Billionaire David Bonderman, whose private equity firm TPG orchestrated dozens of leverage buyouts over the decades since it was founded in 1992, has died at age 82 on Wednesday, December 11. A statement from Bonderman’s family, TPG and the Seattle Kraken NHL team (for which he was the founding owner) said that Bonderman—known as “Bondo”—was surrounded by his family when he died. It did not disclose the cause of his death.
Bonderman was worth an estimated $7.4 billion at his death, per ’ estimates.
Bonderman began his career as a lawyer, working from 1968 to 1969 for the civil rights division of the U.S. Attorney under the administration of President Lyndon Johnson. Then, while working at the law firm Arnold & Porter in Washington, D.C., Bonderman met oil tycoon Robert Bass and later moved to Fort Worth, Texas to help manage Bass’ investments. That led to the formation of buyout firm Texas Pacific Group, later known as TPG.
Below is a May 29, 2000 article from magazine about Bonderman and TPG, written by Mary Beth Grover and republished in full.
DAVID BONDERMAN, THE mega-rich, publicity-shy co-founder of Texas Pacific Group, was partying big time in March. He rented out San Francisco’s City Hall and hired the B52s rock band to entertain clients. “Bondo,” as he is commonly called, is best known for leading the $9 billion reorganization of troubled Continental Airlines in 1993. But his latest exploits gave Bonderman, 57, good reason to boogy the night away: He’d just raised a $4 billion investment fund for Texas Pacific to do corporate takeovers — but not airlines this time. His new maneuverings will surprise you. Bonderman is doing leveraged buyouts of tech companies.
Even before the recent market crash, this dealmaker was finding bargains. The highest profile one: Texas Pacific and Roger McNamee’s brand-new Silver Lake Partners teamed up in April to take private Seagate’s $6 billion (sales) disk drive operation. The price tag was a mere $2 billion.
Yes, you can do an LBO of a technology company. Most big tech firms, of course, are trading too richly to permit a highly leveraged buyer to cover his interest costs. But not all. Seagate’s income before interest, depreciation, amortization and taxes was about $400 million last year, quite enough to service its $1 billion in debt.
A few LBO’d technology companies have already been on a round trip, with the buyer unloading in a public stock offering. In March, for instance, Hicks, Muse, Tate & Furst floated shares in Viasystems, a circuit board manufacturer that it cobbled together from smaller entities bought over the past three years. Hicks, Muse’s $500 million equity investment had turned into $1.2 billion.
But it’s seven-year-old Texas Pacific, based in Fort Worth and San Francisco, that has done the most deals. And one Bonderman just did was a whopper. He and his partners James Coulter, 40, and William Price, 44, got control of SCG Holding, a semiconductor unit of Motorola, in August for a mere $337 million cash investment. This May they took it public and saw their investment balloon on paper to $2.9 billion. The firm also scored a one-time fee of $25 million for engineering the deal.
Tech buyouts have been rare until recently, given the conventional wisdom that this realm was too unpredictable to support borrowings. Then Bonderman realized, says Coulter, that this was like living in 1900 and swearing they “were only going to do agricultural deals — that none of the manufacturing stuff matters. We knew we had to change.” They did. Since then the firm has spent billions of dollars, a lot of it borrowed, to buy tech companies ranging from chip manufacturers to telecom outfits. Forget the flaky dot-coms. Key to Texas Pacific’s success is finding established companies growing at least 10% yearly, with fat cash hoards to use if needed to whittle down debt. The companies must be able to generate enough profit from their products to meet interest payments and fund research, the lifeblood of the tech world.
Above all Bonderman likes his targets to be cheap. These days that means tech-hardware makers, which are vulnerable to the dread accusation of being in a commoditybusiness. Bonderman prefers companies with market valuations of less than one times sales.
How can you profit from this trend? Bonderman won’t divulge his targets, but we culled out some plausible ones: tech companies with price/sales ratios below 1.0 and debt less than cash on hand, (see table). You aren’t going to make a killing here, as you would have holding Qualcomm in 1999, yet you could make a tidy acquisition premium.
Example: Disk drive developer Quantum HDD was in the red last year but has returned to profitability because, among other things, its new Fireball LCT (a 30-gigabyte drive going for $239) is a winner with Hewlett-Packard. Another: NCR, once a misbegotten subsidiary of AT&T, should improve earnings through demand for its automated teller machines overseas.
Bonderman has had an eye for a good deal since his days advising billionaire Robert Bass. Getting cyclical or troubled companies on the cheap is his style. He bought into Continental during the Gulf War when the airlines business was suffering, and savings and loans during the thrift mess. The Asian economic crisis presented him with the opportunity he needed in technology: Sales plummeted on high-tech components due to curtailed Far East demand. And so did the valuations of the component makers.
That was the key to Texas Pacific’s landmark SCG deal — and shows how Bonderman flouts common wisdom. The semiconductor unit, which makes low-level chips used in running household appliances and autos, did not fit with parent Motorola’s new mandate to focus on high-margin chips. But Bonderman rather liked the fact that demand for SCG’s chips was less cyclical than for the chips that go into PCs. Also, since chips used in appliances don’t have to push the limits of lithography, the manufacturing gear is a lot cheaper.
The SCG price tag was $1.6 billion. That was close to just one times sales. Chase Manhattan’s James B. Lee Jr., supplied the debt. It’s an iffy time for tech stocks but chip sales are resurgent. Thus SCG’s stock is up 40% from its $16 offering price in April.
Bonderman’s company scored another coup last summer with public offerings in Paradyne Networks and Globespan. In 1996 Texas Pacific bought Paradyne (and its Globespan unit) from Lucent Technologies in a $175 million transaction. It was an affordable deal valuing the company at just 0.8 times sales. Texas Pacific parlayed a $52 million equity investment into an astounding $3.4 billion. How it pulled that off is instructive.
Lucent had hired Morgan Stanley to auction Paradyne. No one bid. At the time its products didn’t look very promising: digital subscriber and T1 lines, which let you access the Web faster than a plain phone line. Paradyne was losing $4 million a month.
Then Texas Pacific stepped in, persuading Lucent to finance the deal by taking back a 10% note. Even better, Lucent forgave much of the note when it canceled an agreement to sell Paradyne’s broadband products. “They have a catch-a-falling-knife philosophy,” says Mark Bradley, who follows the LBO set for Morgan. But the Paradyne deal cut it: The company made $2.5 million in 2000’s first quarter.
Out of Paradyne, Texas Pacific carved a second company, Globespan Semiconductor, which makes chips for digital subscriber lines — the high-speed Internet connections offered by phone companies. Global grew from a 15-person group inside Paradyne with $2 million in annual sales to 300 people and $56 million in sales. Both companies, taken public last summer, sell well above their offering prices.
Not all deals go so smoothly. In February 1998 Texas Pacific bought chipmaker Zilog for $400 million. That was more than Zilog’s $200 million in revenues — not so good. Moreover Zilog was already shaky, having posted four sequential quarters of declining operating income (in the sense of earnings before depreciation, interest and taxes). The operating net recovered to $47 million last year from $20 million the year before, but that’s still only 1.5 times interest payments versus three times for newly public SCG Holdings. Don’t look for a Zilog public offering soon.
Also troubling is Texas Pacific’s recent loss of technology head David Stanton. He left to start his own firm, Menlo Park, Calif.-based Francisco Partners, with Sanford Robertson, legendary founder of Robertson, Stephens.
Regardless, Bonderman and his crew are happy about the air coming out of many tech outfits because acquisitions will be cheaper. Says Coulter: “I’ve been waking up every morning hoping this would happen.”