Can Private Equity firms revitalize IT enterprise markets and boost innovation?

Giant private equity funds have privatized publicly-traded IT enterprise companies in multi-billion dollar deals — promising greater investments in IT innovation when out of Wall Street's view
Written by Tom Foremski, Contributor

Private equity (PE) firms are acquiring publicly traded IT companies in massive multi-billion dollar deals, a trend that could potentially result in more innovation in IT because Wall Street analysts won't be scrutinizing the company's business on quarterly metrics.

Informatica, which was acquired a year ago by Permira and the Canada Pension Plan Investment Board in a $5.3 billion deal, recently invited journalists to a roundtable dinner to talk about the advantages of being a private company.

I spoke with Informatica executives and also with executives from Tibco earlier this year. Tibco's acquisition by Vista Equity in 2014 is seen as an important private equity deal that followed Dell's privatization and established the start of a broad trend.

The PE firms love the generous profit margins in enterprise IT markets and with some financial re-engineering and reorganization they can resell their companies into future public markets and make a lot of money.

PE firms say they are good for the IT industry because larger investments can be made in innovative IT technologies when Wall Street isn't scrutinizing quarterly performance.

Informatica CEO Anil Chakravarthy, Informatica Chairman Bruce Chizen and Brian Ruder from PE firm Permira spoke at the recent roundtable meeting, which also had some Informatica customers.

The overall message was that being a private rather than publicly-traded company was good for Informatica's customers because it allowed management to focus on business solutions and spending more time with customers rather than Wall Street analysts.

Chakravarthy said that some of Informatica's engineers have begun working closely with customers something that is traditionally rare -- engineers are usually kept far from customers. "The engineers really like the customer contact and it's helping to improve our products." said Chakravarthy.

CEOs have to educate multiple investors on their business goals and revenue forecasts -- revenues are tough to predict when new innovative products are introduced and when business models transition to cloud based services.

Initially, following the acquisition there were concerns among Informatica's workforce but new CEO Anil Chakravarthy, and the new chairman Bruce Chizen, said they dealt with these concerns through many meetings that set out the new strategy and plans for growth.

Informatica says that under its new owners it has managed to significantly increase its R&D budget and that customers approve of the investments it has been making in IT innovation.

Media scrutiny...

Running a publicly-traded company requires regular meetings with analysts and the press, and then you have to do it again every quarter. It's a distraction and a burden for the CEO and CFO.

But being a private company means the loss of coverage by analysts and the press. Private companies are rarely written about because there's no public shareholders that care about the story. It means potential customers don't see the company name as much and name recognition can collapse.

Chizen said that less media attention was one reason why Informatica invited journalists to the roundtable meeting. But Chakravarthy said that less media coverage was not a big issue and that customers were only interested in knowing that Informatica is financially healthy, which it is.

Brian Ruder from Permira said that PE privatization deals are good for the IT industry and that more are on their way. He said that it would not have been possible for Informatica to make the investments in innovation if it had remained a public company.

But he warned that not all PE acquisitions make sense, citing the "puzzling" $1.8 billion Marketo acquisition earlier this year by Vista Equity. The valuation was too high, he said and such deals were likely a product of large PE funds combined with a lack of investment discipline.

However, Vista Equity is not a newbie PE firm with more money than sense. It acquired Tibco in 2014 in a $4.2 billion deal that seems to be going well.

Tibco privatization...

Earlier this year I met with Matt Quinn, CTO and Executive Vice President of Products and Technology at Tibco.

Quinn said that he likes that Tibco is no longer a public company. It's much easier and quicker answering to just one investor than many. He said the new owners allow Tibco to operate with little interference and they understand the value of pursuing long term goals.

And Tibco's customers are pleased that the company has strong financial backing. Informatica

Tibco says that sales are healthy and it is in a better position to support its most important customers.

Both Tibco and financial say they can now make those long-term investments in IT technologies that businesses will need to compete in a future world where agility in business is the measure of success -- IT agility comes first.

Foremski's Take: Is this acquisition trend ultimately good for IT users? Will it result in more innovative IT products?

We have seen what happens when PE firms acquire pharmaceutical companies and the sudden price hikes of life-saving medicines. Will we see something similar in IT markets at some point if the PE acquisitions continue to grow?

The financial exit is always the goal for the new owners and not innovation in IT. How will they get their money back along with a healthy dividend?

Potentially, the reorganized and revitalized IT firms could form a group of high quality investments that would revitalize the moribund IPO pipeline. If retail investors start making money on tech company IPOs then the market could come roaring back.

But that's only if the PE firms will accept lower valuations and leave some money on the table for IPO investors. That won't happen if PE firms pay higher valuations than they can recoup from public markets.

Otherwise, the only other exit strategy is acquisition by a tech giant such as Microsoft, Salesforce, SAP, IBM, Oracle, etc.

Private equity and diversity...

Consolidation in the tech industry is not good for IT users. One of Informatica's key customers, Williams-Sonoma, said diversity in IT vendors is important in helping to keep its IT costs down, and it is a key reason why it buys from Informatica.

Permira has a different view on diversity in IT, allowing Microsoft and Salesforce to make minority investments in the Informatica deal. Permira appears to be covering its bets. If the IPO doesn't happen then Microsoft and Salesforce are potential buyers.

This demonstrates the fundamental mismatch in the goals of PE firms and IT users. For PE firms the exit is the long-term focus -- not innovation and preserving a diversity of IT vendors.

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