4 ms·

this is interesting, seeing a PE firm acquire a public firm. seems the PE firm knows more than the public markets can account for. and sees opportunities to t

by dzonga 4y ago

this is interesting, seeing a PE firm acquire a public firm. seems the PE firm knows more than the public markets can account for. and sees opportunities to trim fat hard, given that they're paying a 34% premium. if I was a zendesk employee I would be worried

hackitup7 4y ago
This is the process by which a high growth unprofitable company becomes a lower growth profitable company. It can be ugly but it's a transition that every company ostensibly needs to make. We're going to see a lot of this as the market turns.
- danpalmer 4y ago
  I agree that every company will likely slow in growth eventually, but I think the PE playbook is different. It's very clearly sacrificing growth, agility, ability to execute, and future potential, for the highest possible short term gains. I don't think that's something every company needs to go through.
- riskneutral 4y ago
  > We're going to see a lot of this as the market turns. Not really. We saw a lot of LBO takeovers before the market turned, and Zendesk is one of those (it was planned 6 months ago). LBO activity is expected to slow down now (it already has). What you will likely see a rise in is a lot of companies cutting costs and going into their bunkers. You don't necessarily need to be taken over a PE firm in order to do that.
- schnevets 4y ago
  Zendesk competitor ServiceNow ($88B Mkt cap) has stated their long-term strategy is upselling to massive customers who will use their more mature features (Operations Management, Security Operations, GRC). If ServiceNow is willing to leave crumbs on the table, I could see Zendesk marketing itself as the go-to firm for smaller IT departments.
mathattack 4y ago
There is a pretty well worn playbook in the PE world: Cut engineering and support, offshore what you can, and take a knife to suppliers. This can be hard for growth oriented management teams to pull off. Companies like IBM and CA do this too with the added financial benefit of being able to centralize most staff functions (finance, HR, etc) and leverage existing low cost locations. Of course this hurts existing customers. In reality it’s moving some of the surplus value generated by the company from the customers and employees back to the shareholders. It’s too complex issue to just say “It’s all good” or “It’s all bad.”
- chrisfrantz 4y ago
  Don’t forget raise prices and make it more difficult to cancel.
- kawsper 4y ago
  I only know of CA because they bought my beloved Flowdock and did exactly what you describe, and it didn't survive, forcing us to switch to Slack. I think Broadcom owns CA now.
  - mathattack 4y ago
    Yes - which of course compounds the issue.
- jsdwarf 4y ago
  Exactly. Tech-oriented shareholders are longing for growth, so PE firms often acquire tech companies with a large customer base but no stellar growth story. Besides cutting costs, they also charge customers more. A classic PE game is to declare a widespread, but no longer innovative software product "end of life" just to charge more for "extended support" contracts. Customers often have said product deeply entrenched in their daily workflows and would inccur high customizing costs if they switch to a competitor. In the end, they are better off paying the support premium. From a funding perspective, PE firms also have an advantage compared to stock exchanges: because their assets are no longer traded daily, the volatility of these assets decreases. The asset value is maybe determined once a year for balance sheet purposes. This means that pension funds and other regulated investors can invest more in the PE sector than in stocks, because technically they are buying "low volatility assets".
maltelandwehr 4y ago
Permira is not that kind of VC. They normal for for growth opportunities. I guess they will try to expand the range of offerings from Zendesk and try to cross-sell these solutions to existing customers. Not necessarily bad for employees.
boringg 4y ago
I'll counter that I think they see a lot of long term value with the market having hemorrhaged a lot and that the PE firm is likely sitting on a lot of cash with very few good options in the asset marketplace. If I had money to buy a company that was putting up good numbers right now with growth oppt that would be a fantastic place to park cash.

by dzonga 4y ago

hackitup7 4y ago

This is the process by which a high growth unprofitable company becomes a lower growth profitable company. It can be ugly but it's a transition that every company ostensibly needs to make. We're going to see a lot of this as the market turns.

danpalmer 4y ago
I agree that every company will likely slow in growth eventually, but I think the PE playbook is different. It's very clearly sacrificing growth, agility, ability to execute, and future potential, for the highest possible short term gains. I don't think that's something every company needs to go through.
riskneutral 4y ago
> We're going to see a lot of this as the market turns. Not really. We saw a lot of LBO takeovers before the market turned, and Zendesk is one of those (it was planned 6 months ago). LBO activity is expected to slow down now (it already has). What you will likely see a rise in is a lot of companies cutting costs and going into their bunkers. You don't necessarily need to be taken over a PE firm in order to do that.
schnevets 4y ago
Zendesk competitor ServiceNow ($88B Mkt cap) has stated their long-term strategy is upselling to massive customers who will use their more mature features (Operations Management, Security Operations, GRC). If ServiceNow is willing to leave crumbs on the table, I could see Zendesk marketing itself as the go-to firm for smaller IT departments.

mathattack 4y ago

There is a pretty well worn playbook in the PE world: Cut engineering and support, offshore what you can, and take a knife to suppliers. This can be hard for growth oriented management teams to pull off. Companies like IBM and CA do this too with the added financial benefit of being able to centralize most staff functions (finance, HR, etc) and leverage existing low cost locations. Of course this hurts existing customers. In reality it’s moving some of the surplus value generated by the company from the customers and employees back to the shareholders. It’s too complex issue to just say “It’s all good” or “It’s all bad.”

chrisfrantz 4y ago
Don’t forget raise prices and make it more difficult to cancel.
kawsper 4y ago
I only know of CA because they bought my beloved Flowdock and did exactly what you describe, and it didn't survive, forcing us to switch to Slack. I think Broadcom owns CA now.
- mathattack 4y ago
  Yes - which of course compounds the issue.
jsdwarf 4y ago
Exactly. Tech-oriented shareholders are longing for growth, so PE firms often acquire tech companies with a large customer base but no stellar growth story. Besides cutting costs, they also charge customers more. A classic PE game is to declare a widespread, but no longer innovative software product "end of life" just to charge more for "extended support" contracts. Customers often have said product deeply entrenched in their daily workflows and would inccur high customizing costs if they switch to a competitor. In the end, they are better off paying the support premium. From a funding perspective, PE firms also have an advantage compared to stock exchanges: because their assets are no longer traded daily, the volatility of these assets decreases. The asset value is maybe determined once a year for balance sheet purposes. This means that pension funds and other regulated investors can invest more in the PE sector than in stocks, because technically they are buying "low volatility assets".

maltelandwehr 4y ago

Permira is not that kind of VC. They normal for for growth opportunities. I guess they will try to expand the range of offerings from Zendesk and try to cross-sell these solutions to existing customers. Not necessarily bad for employees.

boringg 4y ago

I'll counter that I think they see a lot of long term value with the market having hemorrhaged a lot and that the PE firm is likely sitting on a lot of cash with very few good options in the asset marketplace. If I had money to buy a company that was putting up good numbers right now with growth oppt that would be a fantastic place to park cash.