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Off topic, but can you tell me more about the issue with being taken over by a private equity firm? I work for a 10k employee company who will be taken off stoc

• frogfuzion 10y ago
  The easiest and quickest way for the Private Equity company to make your business more profitable is through layoffs. They eventually want to sell the company to make a profit for their investors. In many cases this requires layoffs.
• monkmartinez 10y ago
  It doesn't seem so hard to figure out. The problem is the company is now just part of a portfolio that needs to perform to a certain level. The level of uncertainty with respect to Rackspace just increased 1000% both internally and externally. To me, private equity is a vote of no-confidence. Personally, I fall into the group that thinks private equity is probably bad for the economy in general.
• dave_sullivan 10y ago
  Besides cost cutting via layoffs being a favored (although by no means the only) strategy for PE firms, there's also debt servicing. Typically, PE companies buy the company while only putting down a small portion of the purchasing price. They finance the rest through banks. The whole concept is pretty similar to buying a house with a mortgage, except you're buying a company. The debt payments are then a tax write-off, and all/most available company cashflow is diverted to paying off that loan. The ideal company is one with reliable cashflows and access to a growing market (of which I'd say a large cloud infrastructure provider fits the profile). To improve cashflow: pay fewer people less, convert assets to cash, and/or make more money from your core business. Usually a mix of the three. From an organizational standpoint, you can think of it like Rackspace just took out a very large (maybe subprime) mortgage on the company and some new people are going to try to make sure that doesn't turn out to be a horrible bet, first for the investors, then for the company.
  • NetStrikeForce 10y ago
    Nice explanation. What if the people that got the mortgage for the house just want to make it pretty an resell it? I guess that's the fear here, when the buyer is an investment company (house flipper) and not a technology company that wants to increase their market share or add technology / talent to their portfolio.
    • shostack 10y ago
      And isn't that usually the case with PE? Are there any good examples of them NOT doing this?
  • frik 10y ago
    Thanks for the insightful explanation! What do PE companies do with more than one company with kind of dated offerings in the same/similar niche? Reduce the fat, merge them and sell them to a large company? E.g. Qlik, Riverbed and Dynatrace https://thomabravo.com/portfolio/all/current/ https://thomabravo.com/portfolio/all/current/
    • postgeographic 10y ago
      Yeah, that's called a buy-and-build strategy, or a bolt-hole strategy. A large number of industries or market segments that are fragmented end up consolidating this way. For example, Lumison is a data center business here in the UK, and they got bought out by Bridgepoint Development Capital. Subsequently BDC and Lumison went on to buy a few other data centers, making one larger data center with the attendant economies of scale
  • godzillabrennus 10y ago
    I looked into the PE model after meeting a VC firm GP who wanted to find a way to crash that model into the VC model. Dave explained the formula real well but I've also see that a PE firm will sometimes try and raise additional debt financing to grow the business after it purchases the business with debt. Basically the wager is that they can fuel growth (sales) quickly and sell out for a high enough multiple that they make a ton of money in a relatively short period of a few years. This works in the PE world because these are businesses that have credit and can get debt financing. The typical VC backed company can't get debt financing because they are too risky (early stage) for a traditional lender. That basically but an end to that VC's plan.
• pasbesoin 10y ago
  Look up the terms "profit center" and "cost center". As soon as you hear your area being described as a "cost center", start looking for another job.
  • wpietri 10y ago
    It's such a great example of how accounting drives insane decisions. I will die happy if I can get people to stop thinking in terms of profit vs cost and instead think in terms of value and waste, as the Lean Manufacturing people do.
• archildress 10y ago
  The hallmark of being owned by private equity is slashes t every controllable expense, running supremely lean and generally aligning with short term rewards. Private equity groups don't make money from holding businesses, typically. They make the serious returns when they sell a business to a larger company. Keeping expenses low increases margins and drives the best returns. The problem is that PE management aligns with short term incentive, which is especially difficult for a tech company where value is often derived from high investment into new and emerging technologies.
  • JDDunn9 10y ago
    You have it backwards. It's activist investors (a.k.a. corporate raiders) that push for short-term improvements in the stock market. Investing in long term growth has been a common reason companies went private. While flipping under-valued companies was popular in the 80's, those days of easy pickings are long gone. Private equity is highly competitive today, and you have to have some real management skill to make money (known as "alpha" in the biz).
    • coredog64 10y ago
      One fairly recent example of this in the software business is TIBCO. They were making stupid short-term decisions to satisfy investors. The theory was that going private would allow them to reorganize the business and focus on core competencies without second-guessing by investors. That or it was just a way for Vivek Ranadive to get the maximum payout for his equity stake so that he could focus on running his NBA team. As a side note, I went to the annual TIBCO conference right before the buyout and it was pretty clear there that Vivek didn't give a wet rat's rear about TIBCO or software anymore and just wanted to spend his day being an NBA owner.
• srunni 10y ago
  If you want to know more about PE firms and LBOs, check out the book Barbarians at the Gate: The Fall of RJR Nabisco: https://www.amazon.com/gp/aw/d/0061655554 https://www.amazon.com/gp/aw/d/0061655554
  • beachstartup 10y ago
    i read this book, it's good. i got the overwhelming feeling that once started, the buyout process is outside of any one person or group's control. it takes on a life of its own.
  • roel_v 10y ago
    It's a fun read but not very technical, or rather, not technical at all. It's a story, I didn't learn anything about finance or business strategy from it.
    • srunni 10y ago
      Right, it's good for a weekend read. I wouldn't say it's completely devoid of educational value. It's interesting to see how Johnson manages his board relationships, as well as the details of the bidding process and how difficult it can be to form partnerships. The late 80s were definitely a different time, though - the amount of money needed for the RJR LBO is much more easily accessible to people in similar positions in 2016. As of June 30th, KKR's AUM is $131B, while Blackstone is at $356B. Another good read on PE is King of Capital (https://www.amazon.com/dp/0307886026 https://www.amazon.com/dp/0307886026). If you're interested in learning the technical details of corporate finance, you're probably best off starting with something like the Coursera class Introduction to Corporate Finance (https://www.coursera.org/learn/wharton-finance https://www.coursera.org/learn/wharton-finance), and then reading the textbooks referenced by the course for a more in-depth understanding.
• wpietri 10y ago
  The NYT did a good piece a few years back on how private equity firms totally destroyed Simmons, a mattress company: http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?pagewanted=all&_r=1 http://www.nytimes.com/2009/10/05/business/economy/05simmons... Basically, in theory the best way to make money is to serve your customers well. But in practice, financial engineering creates a lot of opportunities where those diverge. This is hard on employees, who value non-financial things like stability and meaning in their work.
  • shostack 10y ago
    I'd say employees certainly value financial things and that "recurring revenue" from their paycheck is one of them. Liquidity events from a transaction would be another. Unfortunately they typically lose the former and almost certainly never get the latter in a PE deal.
    • wpietri 10y ago
      I'm not denying the financial angle. But people value job stability beyond the pure impact on their bank account. Even if you know you can switch to another job immediately, the worry that you could be laid off at any moment is unpleasant for many.
• nullcipher 10y ago
  Let me guess.. media.net?
• Cymen 10y ago
  I worked for an ISP (Berbee or BINC) that was merged with CDW. It was exactly as outlined above -- the private equity company had a big stake in both and merged them together for a later IPO. In my experience, it was painful because a small highly technical organization was smashed onto a huge sales-centric company. The cultures were not the same at all. It wasn't horrible and I wasn't there long enough to benefit from anything (the Berbee founder gave some ownership to people who had been there longer -- my stay was brief during and after college so it was fine by me). But the resulting company wasn't as interesting to work at and today many of the people I knew who worked there moved on to other competitors in the local market. Nothing wrong with change but it was an awesome company before the merger. So you might expect in the future to be merged with a company that looks good on paper but is painful in practice. But of course from the PE viewpoint, the point is to make money so as long as that happens, it's a win. It's just their interests are probably not aligned with yours.
• yazr 10y ago
  A typical PE buys the company with 20% cash down, and 80% debt (i.e. money borrowed from a bank). They now have to find extra profit to pay the interest. Ideally they also get a healthy dividend or management fee every year. This inevitably comes down to a. increased sales b. cost (i.e. salary) cuts They also want to resell/IPO the company in 3-7 years - obviously for money than they paid for it. This is another constant pressure to increase profit (see a & b above). HOWEVER Growing companies are usually not for sale and are very expensive. They cant be bought by PE. PE often looks for a troubled company which can be bought on the cheap, and can be somehow be kept profitable for a few years. Hence (a) is difficult leading to focus on (b) This of course is not all bad. Some academic studies have shown that PE companies do grow over time. The new management can trim the middle management roles and invest more in real r&d and product. YMMV