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Buyout Boutique Picks Up Tripos Informatics Assets for $25.6M; Will Pursue Add-On M&A

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Vector Capital, a San Francisco-based equity fund that specializes in buying out technology companies, this week said that it will purchase Tripos’ software assets for $25.6 million in cash as the first step in a long-term plan to grow the discovery informatics business through future acquisitions.
 
The deal would mark Vector’s first involvement in the life science informatics market, but the firm, which manages around $600 million in equity capital, has a solid track record of buying and restructuring troubled software firms in other vertical markets, including Internet registry Register.com and graphics software provider Corel.
 
“We believe this is a space that is very fragmented, and over time we would seek to acquire other companies and expand out the business at Tripos through M&A activity,” Amish Mehta, a partner at Vector Capital, told BioInform this week.
 
Mehta noted, however, that Vector’s “immediate focus is going to be the spin-out of the division in a successful manner and its set-up [as] a standalone company.”
 
The transaction is expected to close in the first quarter of 2007, pending approval by Tripos shareholders and other customary closing conditions.
 
Under the terms of the agreement, Tripos will continue to operate its Discovery Informatics business independently until the deal closes. Upon closing, Vector will assume all existing Discovery Informatics customer contracts and obligations and the business will operate as a privately held firm.
 
Tripos will retain “certain assets and substantially all the liabilities of the business, which must be disposed of or satisfied before any distribution to shareholders,” according to a company statement.
 
“Initially, Vector will manage the transition of the business as a private company and will focus on operating efficiencies,” Tripos noted in a filing with the US Securities and Exchange Commission this week. “They expect to continue our heritage of scientific excellence and investment in the Sybyl suite of products.
 
“Over time, they expect to explore and consider add-on acquisitions in order to expand the company, in addition to internal growth opportunities such as Benchware and enterprise informatics,” the SEC filing states.
 
The Tripos Discovery Informatics group will retain the Tripos name and is expected to remain headquartered in St. Louis.   
 
“We’re going to be making job offers to the employees of the informatics business, and hopefully they’ll accept our offer to come over and be part of the private company,” Mehta said.
 
The management structure for the company post-buyout appears to be in flux. In the Tripos SEC filing, Jim Hopkins is listed as “CEO-designate” of the future Tripos business, but further details on the management structure were not provided. John McAlister, the current president and CEO of Tripos, will “advise the new CEO as appropriate,” according to the SEC filing.
 
A Tripos spokeswoman could not confirm whether Bryan Koontz, senior vice president and general manager of the Discovery Informatics business, or Kathleen Mensler, vice president of marketing and corporate development of the Discovery Informatics business, would remain with the firm.
 
Something Old, Something New
 
Mehta said that Vector sees considerable growth opportunity in Tripos’ mix of legacy and newly launched products.
 
“What got us excited about this business was we thought that Tripos had a phenomenal product and customer set in the informatics space with the Sybyl product,” he said. He added that as he and other Vector partners spoke to Tripos customers, “we really got a great appreciation of how important Sybyl was to their productivity.”
 
In addition, he said, Vector views the recently launched Benchware line of products “as one of the phenomenal engines for future growth, and we will continue to invest in that area.”
 
Mehta added that Vector anticipates “being investors in this business for many years to come.”
 
The $25.6 million purchase price comes in slightly below recent annual revenues for Tripos’ Discovery Informatics software and services, which totaled $27.9 million in 2005 and $28.6 million in 2004. For the first nine months of 2006, the Tripos Discovery Informatics group has generated $20.7 million.
 
Mehta said that Vector looked at a number of factors in determining the purchase price, “including the size of the company, and the profit potential, and the stability of the revenue base.”
 
Liquidation
 
The sale of the Discovery Informatics business, coupled with Tripos’ pending divestiture of Discovery Research business, is the culmination of a strategic review process that Tripos entered in January. At the time, the company said that it was considering a number of options for the two halves of its business model, including mergers and acquisitions, becoming a private company, and separating its informatics and research businesses [BioInform 01-13-06].
 
Last week, Tripos confirmed that it planned to sell the two businesses to separate buyers, though it did not provide further details of its plans other to note that it was in “advanced talks.” [BioInform 11-17-06]
 

“We believe this is a space that is very fragmented, and over time we would seek to acquire other companies and expand out the business at Tripos through M&A activity.”

“We didn’t feel that those two businesses were benefiting in any way from being together, so we made an offer to only buy these [software] assets,” Mehta told BioInform. “And at the size and scale of where Tripos is today, we believe that it would be better served as a private company.”
 
Mehta added that he wouldn’t rule out the possibility of Tripos going public once it gets back on its feet. “In the months and years to come, as we grow in scale and acquire other companies, maybe it will make sense for us to return to the public markets,” he said.
 
Tripos officials have noted on several occasions since January that the company’s status as a publicly held firm has been more of a burden than a blessing, citing the high cost of regulatory compliance and the lack of liquidity as particular challenges.
 
In this week’s SEC filing, the company noted that Vector’s “access to capital will facilitate further investment and expansion of products and tools to serve the industry.” In addition, Tripos noted, “the lack of public company status will allow them to make long-term beneficial investments in products and markets that in the near term may be otherwise inappropriate as a public company.”
 
The sale of Discovery Informatics to Vector is the first step in Tripos’ goal of liquidating its assets. “The ultimate dissolution of Tripos provides a greater certainty of value to our stockholders than the continued uncertainty of operating Tripos in its current form or under any other structure that we might reasonably put in place,” the company said in the SEC filing.
 
Tripos expects to distribute between $6 million to $12 million to shareholders following liquidation, assuming completion of the sale of its Discovery Informatics business to Vector, the sale of its Discovery Research business, and the completion of certain other transactions.
 
This week, Tripos disclosed in a separate SEC filing that it had sold four surplus buildings at its Bude, UK, Discovery Research location to real estate investors and Park Research, a local chemistry company. Tripos recognized gross proceeds from the sale of around $1.3 million and recognized a loss for financial reporting purposes of approximately $3.6 million.
 

The company said that it is still in “advanced negotiations” to sell the Discovery Research business.

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