April 29, 2016

What to Expect When Your Company Has Been Acquired by a PE Firm

Quite simply: expect the new private equity (PE) owners to play a very active role in day-to-day management.

In recent years, it has been a common experience for private equity firms to acquire mid-sized technology firms and delist them from the NASDAQ or other exchanges. What is behind this trend, what is the logic of it? High-finance considerations aside, proponents of private equity argue that a concentrated shareholder base, and its associated strong governance, are critical to the next phase of growth.

There may not be complete consensus on that view, but some studies do seem to indicate that PE-owned companies revert to healthy financial performance faster than publicly-traded ones. Consultancy McKinsey & Co provides a glimpse in the following graph:

Companies with revenues greater than $250 million


How do the new owners go about it? Do they do something different from an operational point of view? And more importantly, does it affect you in your daily sales activities?

Technology Finance Partners has observed that high- and mid-level management at acquired firms pay renewed attention to the sense of urgency the new owner brings. And, according to McKinsey, the answer lies squarely in a new, active, PE-designated board. You may certainly have already experienced first-hand some of the following observations if the acquisition happened months ago. PE boards:

• Communicate timelines and milestones – as opposed to visions and expectations
• Engage directly with senior- and mid-level management – as opposed to engaging only with the CEO
• Seek information updates as needed – as opposed to only relying on regular, scheduled reports
• Exercise a bottom-up scrutiny of initiatives – as opposed to only approving top-down activities
• Supports management in the “how” – not only in the “what”
• Is present as an active thought leader, even if not asked for it – as opposed to only communicating incentives and consequences

In the specific case of enterprise-software firms –a space in which Technology Finance Partners specializes– these generic observations are supplemented with the following observations:

• There is a a strong mandate for recurring revenue. Acquired companies are being aligned to bring predictable revenue over long periods. Therefore, both growing license subscription models, and making the most of existing customers, are both high priorities.
Profitability is at least as important as revenue growth. And debt, typically not a worry in the past in this space, must now be repaid as soon as possible. Since it is not only about the revenue line, extreme concessions (in the form of discounting) for the poster deal (typically a very large deal to the quintessential multinational) will be less frequent.
• There is no need to report to analysts, hence there is less pressure on quarterly financial results. But employees should still expect pressure on quarterly progress. This often will mean smaller but more frequent deals. There is a shift: sales heroes will not be the ones that bring big deals if they need 12 or 18 months to make it a reality.

PE firms are often talked-about from a “financial markets perspective”, being regarded as masters of financial leverage, always with an eye on an eventual higher-multiple exit when the markets are right.  Less frequently observed is the implication on the day-to-day operations of the firms they buy. That implication is very real and has a direct impact in your daily sales activities.

Have any questions about how to adjust and refine your practices in this new environment?  Please contact us.


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