Private Equity Changes Software Business Structure and Culture
Software companies are growing increasingly attractive to private equity firms as funded buyouts become mainstream and news about large scale acquisitions such as Facebook’s takeover of Instagram and Glancee whet the appetites of fund managers.
The relatively “immature” balance sheet of software companies is also highly attractive to private equity firms, who believe that the high cash and low debts of software companies can be leveraged for even further profits. For software, this kind of established funding can seem very attractive, particularly once the company has successfully launched and established a significant profit model. That being said, it is important to realize the impact that private equity can have on a software business in particular, since it will now operate within the business model of the firm.
One such factor is the methodology a firm will have once the business is taken over. A popular one is the “buy and build” approach, used by such firms as Thoma Bravo. Essentially, the business is treated as a platform from which more profitable services and software can be produced. In Thoma Bravo’s case, they prefer to let businesses operate relatively autonomously with the existing leadership team intact. However, even within this methodology that is not always the case. Top-down changes are not uncommon once owning shares are transferred to a private firm, and this can substantially change company culture and values. This is not always a bad thing. There is a reason that the firm took over the business and leadership often has a great deal to do with that. Still, the possibility is there and should be acknowledged.
Another consideration is the ultimate reason the firm acquired the company. It doesn’t necessarily have to rest upon a decision to perpetuate the company in any semblance of its form at the time of acquisition. Some firms choose instead to leverage the cash reserves and profits of a company to finance deals with more room for growth, and then return the company to the markets once the utility runs out. This can be very damaging for a company, as the emphasis shifts from development to increasing short-term cash at all costs. Obviously this leaves the company in poor condition once it becomes loaded with debt and deprived of innovation for the duration of ownership.
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