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$189 million bonanza on lucky venture MFS' takeover of Uunet to benefit local firm's clients; Humbled and looking ahead; At NEA it's 'thank God and we're on to the next dream'; Venture capital

Of all the beneficiaries of last week's $2 billion deal for MFS Communications Co. to take over Internet access provider Uunet Technologies Inc., one of the biggest will be a Baltimore venture capital firm that stands to make $189 million on a $4 million investment.

New Enterprise Associates controlled 10.1 percent of Fairfax, Va.-based Uunet, having paid $3.9 million for the stake in 1994. NEA endured a wild roller-coaster ride in Uunet's stock price after the company went public last May, and stands to make a killing for its clients when the merger goes through.

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"We've done it on multiple occasions," said NEA general partner Charles W. Newhall III. "It's not all in a day's work -- we're humbled by it -- but we live in a field of dreams. We say 'thank God' and we're on to the next dream."

The 18-year-old firm has invested in about 320 companies, which Newhall said have $18 billion in annual revenues. NEA has capitalized on the historic bull market for new stock issues that has made millionaires out of people who founded NEA-backed companies such as Genetic Therapy Inc. of Gaithersburg and Integrated Health Systems Inc. of Owings Mills.

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In most cases, venture capitalists get paid when a company is sold or goes public. NEA's 15 initial public offerings last year topped the venture capital industry for the third time in four years, according to a report by San Francisco-based Venture-One Corp.

"Over the last five years, NEA has averaged one IPO a month -- a remarkable track record for an entrepreneurial money machine," Venture-One said.

Not nearly all the cash from the Uunet takeover will go to NEA's principals, however. The investment was made with part of a $200 million fund the firm raised from pension funds and other investors in the early 1990s, Newhall said. NEA principals put up 1 percent, and otherwise get paid a share of the profits above the $200 million invested.

Given the hit on Uunet, almost any return at all on the other $196 million in the pool is pure profit.

"Every charity in town comes to me and says, 'you own so many million shares,' " Newhall jokes. More seriously, he said, "it's the customer's yacht. Our partnerships are structured to look out for our customers' interests."

Uunet founder Richard Adams was basically an engineer with a vision when he went looking for money in 1994. He met up with NEA, and with two other venture firms, and quickly raised the money he needed to move forward.

But it came with a price. The venture capitalists decided that Uunet needed upgraded management. "They said, basically, we're going to hire a management team and we're going to put some money in," said Uunet President and Chief Executive John W. Sidgmore [Adams is now Uunet's chairman]. "They brought people in in early '94."

Sidgmore, a colleague of NEA partner Peter Barris when they both worked for General Electric Co., was at the top of the list. He had sold Intelecom Solutions, a Montgomery County software firm, to Computer Sciences Corp. in 1991 and was still running Intelecom for the new owner when Barris approached him.

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"He basically convinced me this would be an exciting area to work in," Sidgmore said. "It was a little tiny company, much smaller than the one I was running. But Peter convinced me it was a terrific opportunity."

That it was. But even Sidgmore admits that he had no idea how terrific.

"No, of course not," he said. "But you have to remember no one knew anything about the Internet two years ago. Now everyone thinks they're an expert."

What happened in between was 1995. Uunet did some big things right, and also rode a wave of interest in the Internet that was mostly beyond its control.

On its own, Uunet decided to focus on the business market, avoiding low-margin competition with the likes of America Online for consumers' business. And it made a key alliance with software titan Microsoft Corp., which took a 13 percent stake in Uunet.

"Microsoft, in essence, financed development of the network," Sidgmore said.

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By then, the media had joined the Internet hype, and so had the stock market. And, Sidgmore says, there was good reason.

"People realized the Internet would become a revolutionary technology," he said. "It enables virtually everyone to communicate with each other, and it was dramatically cheaper than conventional networks. These two things were a sea change."

The wave allowed Uunet to go public at $47 a share last May. From then it was a roller-coaster, with the stock rocketing above $70, then plummeting as low as $24.50 after AT&T; Corp. said it was getting into the Internet access business, then rebounding as optimists comforted themselves with the idea that upstart AT&T; challengers past have grown into companies like MCI Communications Corp.

The takeover price was $61 a share. But the deal attracted negative attention as well, because suspicious trading in Uunet options made it appear news of the deal had leaked prematurely. Sidgmore said the company doesn't know who bought the options before the deal.

"A lot of communications technologies have come and gone, and AT&T; hasn't dominated them," Newhall said. "We felt that if you went into the business end of the Internet backbone, you could add products and services to be competitive."

But Sidgmore said the company made the deal because moves like AT&T;'s entry make the Internet business much more competitive.

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The Virginia company simply needed a bigger partner with deeper pockets to make the technology investments Uunet will need to keep up.

"The Internet is getting very serious, and there are going to be a lot of very serious players," he said. "If we want to remain a leader, we were not going to be able to do it on our own."

Newhall said NEA's 16 investment professionals, based on St. Paul Street and in Silicon Valley, live by their ability to spot trends, mostly in health care and information technology industries. "In our business, our success is determined by our ability to participate in things that change the way the world is," he said. "I think we've done that."

"We've basically succeeded in what we dreamed of doing: starting businesses that are important."

Pub Date: 5/06/96


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