Why are software vendors going private?

For a private IT company, an IPO is seen as the ultimate achievement. But another trend is accelerating: public companies going private

I wrote a while ago about the marketing of going public, and how Hortonworks' early stage IPO was a bold move designed to re-capture focus from the industry. So far the bet seems to be paying off, Hortonworks having recently announced strong numbers.

Hortonworks is not alone. There are many IPOs happening or planned for this year. At the same time, we are seeing several large vendors withdraw from the public market. In the integration space alone, TIBCO made the move less than a year ago (September 2014), and Informatica just completed a similar process this month. Looking beyond software, maybe the most visible of such "go private" was Dell, which was taken private by its founder and Silver Lake Capital in 2013.

The Dell story

Michael Dell has always been straightforward on why he wanted to go private: To be left alone! As the press release said, "under a new private ownership structure, Dell will be even more flexible and entrepreneurial." And indeed, for a large company under investors' scrutiny, being entrepreneurial and nimble is difficult. Investments in long-term innovation are often at odds with expectations from Wall Street, and an initiative that does not deliver results in a few quarters needs to get canned or it impacts the stock price.

TIBCO, a longtime leader in need of a transition

Like all vendors in a fast-moving space, TIBCO was subject to intense scrutiny from financial analysts, and needed to make bold moves: Cuts in their legacy product portfolio, acceleration of the move to the cloud -- all of which comes with a big hit to the EBITDA as revenues move from perpetual licenses to subscription. Going private was probably the only way for TIBCO to drive this transition without loosing 75% of its value.

Informatica: private, or acquired?

On the surface, the Informatica move looks very similar to TIBCO's: Transition to a subscription model, redefinition of the product portfolio to address a shifting market. But at the time the vendor completed the move, they announced that both Microsoft and Salesforce.com were buying into the newly-private company -- just not how much.

It will be interesting to see how this plays out. The Salesforce investment is logical, given that Informatica has been a strong contender for integrating Salesforce data in the cloud, and it confirms Informatica's cloud strategy. Microsoft is maybe more surprising, after all Microsoft has been including many integration and MDM capabilities in SQL Server at no (extra) cost, but they were never able to become a strong integration player.

A few big vendors have resisted the IPO temptation

Some just choose to remain private. Among the largest ones, who could have IPOed if they had chosen to, SAS and Information Builders are the most prominent. Jim Goodnight and Gerry Cohen have had the luxury to run their companies as they see fit, and it seems to have worked well for them both.

Some are public but act like they're private

Another CEO tried to run his company without any consideration for Wall Street, but the issue was that this company was actually public. When Michael Saylor was obstinately refusing to speak to investors and analysts, Microstrategy's stock was doing really poorly compared to other vendors in the space. A recent reversal of this strategy has seen the company's value increase considerably, even in trying times.

Clearly, being public for a software vendor is no walk in the park, and it must be done right. And let's not forget it's also the most proven way so far to attract, and reward, early-stage investors and employees!

Copyright © 2015 IDG Communications, Inc.

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