Forbes deal raises eyebrows

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August 09, 2006|By NEW YORK TIMES NEWS SERVICE

What does the lead singer of a rock band want with a financial magazine empire?

That was the question Wall Street bankers were whispering after the Forbes family said Monday that it had sold a minority interest in its publishing business to Elevation Partners LP, a private equity firm that counts Bono of U2 as a managing director.

But the bankers weren't talking about Bono.

They were talking about a co-founder of Elevation, Roger McNamee, a one-time star money manager at T. Rowe Price Group Inc. and now a force in Silicon Valley venture capital and private equity circles, who moonlights as lead singer and guitarist for the Flying Other Brothers. The band, inspired by the Grateful Dead, has amassed a cult following among the West Coast middle-aged hippie technorati.

McNamee, 50, was the man behind Monday's transaction, which, though not disclosed, was worth about $250 million for 40 percent of Forbes Media, according to people involved in the deal.

For someone who has spent a career investing in new technology, an investment in a magazine company is a new tune for McNamee. But in talking about Forbes, he still sounds like a technology visionary.

The media business, he said, is "in the middle of a transformation and no one is in charge."

"Everyone can play and anyone can win," he said Monday. Elevation's edge is in its ability to help old-line media companies conquer the brave new Internet world. "And Forbes has already won the first round," he said, referring to its successful Web site, which had 10 million unique visitors worldwide in June, according to comScore Media Metrix.

McNamee, a gregarious financier with a shoot-from-the-hip approach, has an enviable track record. He co-founded Silver Lake Partners, the first private equity firm to focus successfully on technology companies, and bought businesses like Seagate Technology. Last year, Silver Lake led a consortium in the $11.3 billion buyout of SunGard Data Systems, the largest technology leveraged buyout to date.

Earlier, in 1991, he left T. Rowe Price to co-found Integral Capital Partners, an investment firm that invested early in Intuit and Flextronics, that was spun off from the venerable Silicon Valley venture capital firm Kleiner Perkins Caulfield & Byers. He made his first fortune and reputation in the late 1980s running Price's Science and Technology Fund, where he was one of the original investors in Electronic Arts, the video game maker.

Several other big names in buyouts and technology run Elevation: Fred Anderson, former chief financial officer of Apple Computer Inc.; John Riccitiello, former president and chief operating officer of the video game publisher Electronic Arts; Marc Bodnick, founding principal of Silver Lake Partners; and Bret Pearlman, former managing director of the Blackstone Group.

Elevation's first two deals were for Move, formerly called Homestore, and BioWare/Pandemic Studios. It also tried unsuccessfully to buy Eidos Interactive.

Now, while Bono may have given Elevation some early cachet, the Forbes deal puts Elevation's record as an investor in the spotlight, putting enormous pressure on McNamee to make it a success.

"We're not Blackstone," he said, referring to one of the best-known giants in private equity. "If this doesn't work, it's not like no one will know."

About two-thirds of Elevation's investment will be used to build out Forbes' ambitious online strategy, which is at the center of Elevation's interest in the company, according to people involved in the deal. Another third will be used to pay Forbes family members, who had sought a larger dividend to help pay its expenses.

The price tag took some by surprise. It "is a bit of a whopper," Om Malik, a journalist who worked on the startup team at Forbes.com, wrote on his blog, GigaOm. But it's "nothing close to what the Forbes family could have gotten in the 1990s bubble."

Elevation's deal with the Forbes family is not without risk. Perhaps the biggest will come in several years, when Elevation will have to cash out of its stake to pay its investors. How Elevation would cash out is unclear. The Forbes family has the right of first refusal to buy Elevation's stake if it seeks to sell it, people involved in the deal said.

The most elegant exit could be an initial public offering, these people said, though Steve Forbes has been quite vocal about his intention to remain private.

McNamee declined to divulge the terms of a possible exit, but did say that: "Nothing is off the table. Everything is open."

He added that, "If the family has a strong choice, we've made provisions so that that can be managed. You can rest assured that the terms of the deal protect both sides."

One of the other big risks is whether Forbes' success online will be sustainable. Some analysts contend that much of Forbes' enormous number of page views comes less from users seeking Forbes-branded content than from a variety of short-term efforts to drive traffic - such as pay-for-click agreements with AOL and Yahoo and a successful effort at search optimization.

McNamee says he is not worried. "It's just the first generation. It's going to be an adventure." And along the way, he promised, "We're going to make Steve Forbes into a rocker yet."

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