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Last month Informatica announced that it intends to go private, via a leveraged buyout (LBO), later this year. Assuming that this goes ahead, what are the implications?
It is worth, first of all, considering why an organisation would privatise itself or, turning that question around, why a private equity company would want to acquire a public company. There are a number of reasons. The first is that the company is in financial difficulty (think ASG, which recently emerged from Chapter 11 under new owners), second is that the company has great technology but can’t market its way out of a paper bag (think TIBCO), the third is that you were the founder of the company – which you floated – but can’t let go (think Michael Dell), the fourth is that you need time to reinvent and restructure your company and products free from the demands of quarterly reporting, and the fifth is that it is all about profit for the investors.
Informatica is clearly not in any of the first three categories so the question is whether it is in the fourth or fifth – or both – they are not mutually exclusive. Moreover, there is nothing wrong with making profits if, and it’s a big if, that is not at the expense of customers.
So, does it make sense that Informatica might want to restructure? If you think about Informatica’s portfolio of products it has a lot of historical on-premise data integration and data governance software and, on the other hand, it has moved successfully into the cloud as well as introducing new products in areas such as data preparation and security. In particular, how do you preserve the legacy cash cows (notably PowerCenter) while exploiting the cloud? The sales model (licensing vs rental) is different and so are the margins. The danger is that the latter subsumes the former. So, yes, there is a potential and valid argument in favour of some sort of re-structuring.
The other issue that concerns me is the LBO itself. According to an article by Reuters (http://www.reuters.com/article/2015/04/24/private-equity-loans-idUSL4N0XL5U620150424) banks are providing $2.625 billion of long-term debt finance to enable the LBO (out of a total of $5.3 billion). By any standards that’s a lot of money. Moreover, this is what is known as a “criticised loan” under the Lending Leverage Controls (LLC) that were introduced last year, in that the ratio of loan to EBITDA for the previous 12 months exceeds six. This is worrying. On the other hand I suppose you could argue that Permira and CPPIB (the buyers) could have gone for even more leverage.
Ultimately, the private equity investors are going to want to get their money back and make a profit and to do that they must sell to a third party or re-float. Undoubtedly, what emerges will be different from the company we see today. The question is: will it still be one company? There has to a significant possibility that it won’t be, that parts of the company will be sold off as independent entities. And if that happens then the most likely thing is that there would be one organisation focused on what are effectively the cash cows in Informatica’s business and a second and possibly third that are focused on cloud and new technology areas. Except that there is a problem here: Informatica has made much of the fact that its Vibe engine is at the core of (almost) all of its products which means that, at the least, there will remain strong technological links across whatever emerges in the way of companies and corporations, or perhaps Vibe will be developed as a further independent entity, licensing its engine to the other organisations.
All this is speculation of course. What I am sure about is that this creates uncertainty and, at worst, fear. Both existing customers and potential users of traditional Informatica products such as PowerCenter may be concerned that R&D will be more focused on cloud-based and other new solutions at the expense of those that are already existing. In any case, uncertainty is bad for business: if you are looking for some sort of solution within Informatica’s area of expertise, and it’s a close call between Informatica and a third party, then you’re likely to go with the latter precisely because there must be concern about how this will all pan out. It’s possible, for example, that some products will be deprecated or sold off. Worse, this uncertainty isn’t going to go away anytime soon: no doubt the hubbub will die down once the LBO is completed but until clear plans are laid out by the investors, competitive vendors will point to the sorts of concerns I have raised here, and that will be bad for Informatica’s business.
The bottom line is that you can’t be sure that the Informatica we have all known and loved will still be the same in a few year’s time. While Informatica made reassuring noises at its recent Informatica World conference (see http://www.bloorresearch.com/blog/im-blog/2015/5/informatica-conference-update/) there is not a lot it can say at this point in time and there must be a significant chance that Informatica will cease to resemble its current self at some point in the future. What we can’t be clear about is what it will look like. The sooner we know what is going to happen the better, but I actually expect that information later rather than sooner.