Business Opinion: Riverdeep and Barry O'Callaghan are back with a vengeance. Of course they never really went away and have been profitably slogging away at the US online education market for the last couple of years.
But now the company has Davy Stockbrokers out beating the bushes here looking for $200 million (€157 million) in private equity to underpin a very ambitious and highly leveraged €3.3 billion takeover of US publisher Houghton Mifflin.
The initial feedback appears good and Davy are reportedly having little trouble lining up investors, with the placement said to be significantly oversubscribed despite a minimum threshold of $1 million.
The threshold effectively excludes small punters and that is no bad thing, as Riverdeep's brief period on the stock market left many with a sour taste. O'Callaghan came in for a lot of criticism in 2002 when he took Riverdeep private at $1.51 a share, having floated in March 2000 at $3.31. Many felt the offer significantly undervalued the company, which Goodbody Stockbrokers believed was worth €2.27 a share while Merrion talked of €3.50 a share. Institutional shareholders contrasted the offer with the bullish comments made only a few months earlier when shares were placed with IBM and Gores technology for €2.23.
Some went as far as to accuse O'Callaghan of undermining the share price by the surprise purchase of a company called Broderbund, delisting Riverdeep from Nasdaq and then botching an important conference call with analysts. While it could be argued that O'Callaghan could have done more to defend the Riverdeep share price, the reality was that he could not stem the tide of negative sentiment against technology companies, which was the main drag on the share. But perhaps the strongest argument in his favour was the inclusion in his bid of a commitment to sell the shares he controlled along with those of founder Pat McDonagh if a higher bid came along.
No higher bid came along and the rest, as they say, is history. O'Callaghan can look forward to the latest in series of big paydays should the Houghton Mifflin deal go through.
His supporters - and there are plenty of them - argue he deserves his money. Not only is he being rewarded for having had more faith in the Riverdeep business model than the market did, he also deserves it for being quick to see the coming vogue for private equity.
Riverdeep was one of the first new-style private equity deals done in the Irish market. Rather than spend years turning around a struggling company, the new owners of Riverdeep, Alchemy Partners and MSD Private Equity, were on the way out the door with a substantial profit the following year after a refinancing raised more than $225 million.
It is a familiar pattern nowadays, but the unseemly haste with which the new investors refinanced, turned a profit and left, only fuelled the sense of injustice amongst the original shareholders.
The following year O'Callaghan and McDonagh refinanced the company again, receiving dividends of more than €45 million each, which they reportedly used to pay off borrowings taken out to increase their stakes the previous year.
The transaction now being contemplated by Riverdeep owes as much to the same pervasive private equity culture as it does to the idea of building a sustainable business.
Houghton Mifflin has already been subjected to the private equity treatment once already. It was bought in 2002 by Thomas H Lee, Bain Capital and Blackstone for $1.6 billion and they now stand to pocket a tidy profit when it is sold on to Riverdeep.
But there is still some juice left in the schoolbook publisher for Riverdeep and the other new investors to squeeze out. Indeed there is quite a lot of juice - on the basis of the sort of numbers being put about by Davy. The pool of investors being courted by Davy have been told they will double their money within two years, either via a flotation or yet another refinancing of the company. The presumption is that if they are being offered such lucrative terms, the various banks and institutions providing the other €4 billion or so needed to finance the deal will also do nicely.
It is hard not to come to the opinion that what is being planned by Riverdeep is as much about pulling off another private equity-style coup as it is about building a major force in the online educational publishing business. But that is not really the concern of investors coming on board; it is the people who buy the company from them when it comes to the market in two or three years' time who might want to worry about that.
This is of course a very bleak take on what - viewed from another angle - is another fantastic Irish business story: plucky Irish company that all but disappeared in the dot.com meltdown re-emerges as one of the biggest players in academic publishing.
The reality probably lies somewhere between the two positions. One useful question is whether you think O'Callaghan left Credit Suisse First Boston to join Riverdeep in 1999 because he wanted to get rich the hard way.
