“Just before the buyout, the company had $2.2 billion in cash and cash-equivalents. By 2017, its stockpile had shriveled to $301 million, even as its debt burden ballooned from $2.3 billion to $5.2 billion. Meanwhile, Toys ‘R’ Us was paying $425 million to $517 million in interest every year. This enormous cash drain probably made it impossible for the company to invest or innovate even if its trio of buyers had been up to the challenge.”
Debt is its own disruption.
Original source: How vulture capitalists ate Toys ‘R’ Us
Silver Lake plans to announce on Tuesday that it has closed its fifth buyout fund at $15 billion, one of the biggest ever dedicated to technology deals. That exceeds the $12.5 billion fund-raising target that the firm had previously aimed for and brings the firm’s total assets and committed capital to about $39 billion.
They seem to get good returns:
Silver Lake’s fourth fund, with $10.5 billion under management, currently boasts returns of nearly 31 percent, according to the data provider PitchBook.
Meanwhile, as Dan Primack mentioned, you can expect $100bn from SoftBank.
What this means is that more older, lower growth software companies will be taken private. More than likely, their day-to-day operations will be optimized to get their cash-flow fixed up and increase profits. These companies can then act as cash machines and find some exit after the PE owners “fix” management and operations problems at the company.
That usually means consolidation, which results in firing people, but also fixing stubborn “frozen middle” problems that have preventing each product line from evolving and getting a better ongoing product/market for, meaning: being something that customers want to use and keep buying. There can also just be a lot of “bloat” in older product lines, esp. when it comes to effective product management, marketing, and developers following old, slow, but comfortable processes.
And, sometimes, as you see at IBM, you just have to shut down old business in favor of building new ones. This means a top-line revenue hit, which means slowing or killing quarterly growth. As IBM has been demonstrating for 20 quarters, when you’re public, ain’t nobody got time for that. In theory, when private, you can choose that option.
As Brenon at 451 has noted, going private deals like these are growing much more than “corporate” acquisitions (like when Microsoft, Cisco, IBM, etc. buy a company to integrate into their product portfolio rather than optimize the company as discussed here). It doesn’t always work, but that “nearly 30%” return indicates that it works more than enough.
The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing ones have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital and TA Associates announced as many deals in Q1 2017 as each of the firms would typically print in an entire year. Additionally, both Vista Equity Partners and Thoma Bravo averaged almost two transactions per month in Q1, if we include deals done by their portfolio companies as well.
From Brenon at 451, and with some charts too:
“The whole entire space is going through a transformation to cloud computing, and it feels like the entire industry is for sale,” Orlando Bravo, a managing partner at [Thoma Bravo], said in a telephone interview.
- “The firm, Thoma Bravo, said on Monday that it had closed its 12th fund at $7.6 billion, which surpassed an initial target of about $7 billion because of high investor demand.”
- “Thoma Bravo’s previous funds have generated internal rates of return ranging from 20 to 45 percent.”
And from a press release about raising the recent $7.6bn fund (Fund XII):
- “Since 2003, Thoma Bravo has completed more than 140 software and technology-enabled service acquisitions, representing about $30 billion in enterprise value.”
- “Representative past and present portfolio companies include industry leaders such as Datatel, Digital Insight, Entrust, SonicWall, Network Instruments, Hyland Software, Deltek, Blue Coat Systems, Elemica, Riverbed, Compuware and SolarWinds.”
Qlik is one of the more recent buys, for $3bn. Trefis did some good, brief coverage noting that Qlik had a loss for the past three years likely due to the usual focus on top-line revenue growth, that is “due to high Selling, General and Administrative (SG&A) and R&D expenses.”
One would expect the usual course of PE “optimizing,” getting rid of those staff and scaling by coasting on the brand name of steady drip of new features. That is, you move a hockey-stick of expensive growth to a more leisurely hill and take out profits, cleaning up shop to be sold off to someone else who’ll make that hill into a plateau.
See also a 2014 profile of the firm, including some tech investments of note.
- Apollo Global Management paying $4.3bn to acquire Rackspace, $32 a share in cash, a 38 percent premium (Bloomberg)
- Competing against AWS is hard, plus the other mega public cloud plays: “Google’s parent, Alphabet Inc., Amazon and Microsoft have combined cash holdings of more than $200 billion compared to Rackspace’s less than $1 billion.”
- Brenon at 451 points out that Rackspace throws off a good amount of cash, “$674m of EBITDA over the past year,” and concludes:
- More from Brenon: “While we could imagine that focus on customer service as competitive differentiator might set up some tension under PE ownership (people are expensive and tend not to scale very well), Rackspace has the advantage of having built that into a profitable business. In short, Rackspace is just the sort of business that should fit comfortably in a PE portfolio.”
- Meanwhile, as we discuss on Software Defined Talk (#70, “No one wants to eat a finger-pie”), AWS is at a run-rate of ~$10-11bn and growing.
- In the recent Gartner IaaS Magic Quadrant, Racksapce is in the dread lower left hand corner. To be fair, a whole other MQ, “Cloud Enabled Managed Hosting,” which maps closer to what Rackspace says is their core strategy in cloud, has Rackspace leading. But, back to that “normal IaaS” MQ:
- The MQ says “Rackspace has successfully pivoted from its ‘Open Cloud Company,’ OpenStack-oriented strategy, and returned to its roots as “a company of experts emphasizing its managed service expertise and superior support experience.”
- Also: “Rackspace will continue to divert investment from its Public Cloud to other areas of its business, rather than try to compete directly for self-managed public cloud IaaS against market-leading providers that can rapidly deliver innovative capabilities at very low cost, or against established IT vendors that have much greater resources and global sales reach.”
- See also Rachel’s analysis over at RedMonk.
Finally, check out a tad of commentary on the deal in #32 of Pivotal Conversations.