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July was a surreal month for Betsy Bayha. NetIQ Corp., where she’d been general counsel for five years, had been hit by the wave of private-equity-driven deals sweeping the country. Management announced in April that the business software company would be bought by Seattle-based AttachmateWRQ, owned by a consortium of private equity firms. Though the $495 million deal made good business sense, the company’s employees suddenly faced a tenuous future � including its GC. With the company now private, and no more voluminous securities regulations to negotiate, the legal team of 13 was slashed by more than half. Toward the end of the month, Bayha found herself delivering boxes of records to the company’s San Jose headquarters, and executing her final role as GC: helping the company transition its legal department to Houston, Texas. Her last day was July 31. “Every time you consolidate, you take a GC out,” she said. And Bayha won’t be the last. As private equity buyers look for new places to put their money, tech companies are on their shopping list. Blue Martini Software Inc. went private in May 2005, and San Mateo Serena Software Inc. followed suit in March 2006. “We’re seeing a number of private equity consolidation or ‘roll up’ plays,” said David Healy, co-chairman of Fenwick & West’s mergers and acquisitions group. In such deals, a series of formerly public companies are consolidated into a privately held company, creating what Healy describes as “a combined company that’s more viable and powerful than the sum of its parts, usually with the notion to take the whole company public later at a substantial uplift in valuation.” While that’s the ideal plan for investors, it’s trouble for in-house lawyers. Unless the new company is “growing like crazy,” Healy said, layoffs are likely across the board, including in the legal department. “Given private equity [companies'] penchant for cost cutting in order to maximize cash flow, the target in-house counsel team would likely be a victim of cost cutting,” he said. “In the near-term and at a minimum, the securities lawyers are expendable or need to be retooled to the new needs of the company.” Jennifer Muller, director of investment bank Houlihan Lokey Howard & Zukin, said private-equity buyouts are rising fast. “Over 20 percent of technology buyouts announced in 2006 have been private equity buyers,” she said, citing numbers from business consultancy FactSet Mergerstat. “It was only 10 percent a few years ago.” TREADING WATER NetIQ, Bayha said, had for several years made the usual attempts to boost earnings. The company had reported operating losses since 2003, which, according to SEC filings, continued this year. In the quarter ending March 31, revenues of $46 million represented an operating loss of nearly $4 million. The company tried outsourcing product development to India and downsizing. When AttachmateWRQ expressed interest in buying the company, Bayha said, it made sense on several fronts � not the least of which was in overall expenses. “We estimated the savings would be in excess of $5 million,” she said. “The going-private dividend could be achieved almost immediately through headcount reductions, decreased audit and Sarbanes-Oxley compliance charges and reduced D&O insurance costs,” plus the elimination or reduction of board fees, stock services and investor relations functions, she added. Ben Portusach, managing director of Sunnyvale business consultancy Portston Inc., said that, in general, a company with a market cap between $100 and $500 million can expect to incur anywhere from $250,000 to $500,000 in external auditor fees associated with Sarbanes-Oxley re-quirements. “That does not even include financial statement audit fees,” Portusach said, nor what a company would pay for consultants � like Portusach � to assist with internal compliance needs. For NetIQ, audit fees and Sarbanes-Oxley savings alone added up to more than $2 million, Bayha said. “That was two pennies a share that could have gone to development and sales,” she said. “Mostly, it could be going toward achieving better earnings.” PAINFUL ADJUSTMENTS From the start, NetIQ’s new ownership planned to eliminate most financial and legal staff and consolidate its business in Houston, Texas, according to Bayha. On July 1, the chief executive, the chief financial officer and other San Jose executives walked. And, before her own position would be phased out, the former Coudert Brothers partner watched the “surreal” transition as about half of NetIQ’s 800 employees were laid off or left voluntarily. The pre-merger legal team had three lawyers, four contract managers who negotiated revenue agreements, three stock services staffers in charge of employee equity program, two administrative personnel and one paralegal. “The immediate impact of the merger was to eliminate the stock services component,” Bayha said. By the beginning of August, six people in San Jose were gone. By October, the remaining four, who are finishing their transition period, will also leave the company. The AttachmateWRQ GC took over the legal work of both companies, and the newer, leaner legal department � manned by two lawyers � would fill a more day-to-day operational role with less emphasis on M&A activities, Bayha said. AttachmateWRQ declined to comment for this story. Charged with winding down the legal function in San Jose, Bayha’s role shifted from strategic executive to the keeper of the company’s paper legacy. As the company completely shut down its stock services and all employees were cashed out, one of Bayha’s most important tasks became to ensure that all records were properly conserved and all cashing-out stock transactions were properly reported to the individuals and to the Internal Revenue Service. For now, she’s catching up on R&R. “Needless to say, this was a very time-intensive and wearing process, so I plan to take a few months off and evaluate my options for the next adventure come fall.”

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