Dell may be the largest tech company to ever go private, but it is by no means the only vendor that has decided it would be better off to pursue strategic options without the constant second guessing of public investors. To learn more about the trend, Network World Editor in Chief John Dix talked with Seth Boro, a Managing Partner at Private Equity firm Thoma Bravo, which has taken Riverbed, Dynatrace and other network companies private, and with Kevin Thompson, CEO of SolarWinds, a supplier of IT management tools that Thoma Bravo helped take private in a $4.5 billion deal last February.
Below is the interview with Thompson from SolarWinds. Click here for the interview with Boro from Thoma Bravo.
Before we reflect on why you went private, let’s start with a thumbnail description of your company?
I’ll give you the brief history lesson. The company was founded by Donald Yonce in Tulsa, Oklahoma in 1998, so we’re about 18 years old. Don was a network engineer who worked for Walmart and believed the tools he had been given to do his job weren’t very good and that he could build better ones. So that’s what he did.
He wrote a tool at home and he built a website and stuck it up there and made it freely available to download and try for 30 days, and the product started to sell. He never took any outside money. The only money he put in it was his own time to start.
But eventually the product started generating enough cash that he could invest in the business. He didn’t have any real sales guys. He had a couple order-takers. He didn’t have a real support organization. Basically whoever picked up the phone when a customer called would help that customer out. He managed to get the business to about $20 million in revenue and $18 million in profit with about 15 employees.
When the professional management team got here, and I was part of that, there were 18-20 employees, we had 40,000 customers, and we were smart enough to not screw up the equation. We just put it on steroids. We expanded it. We have about 34 products today compared to the two they had when I got here, but we continue to be a try-and-buy model, we don’t customize the software, we don’t have any consultants and we don’t do custom contracts.
There are so many nuanced pockets in this market, how do you define what SolarWinds targets?
Basically if you are trying to manage performance of any piece of IT infrastructure, we believe that is the market we play in. Do we manage the performance of every single piece of IT infrastructure? No. Not yet. But we manage the performance of all the critical pieces of IT infrastructure today.
We define it that way because we believe the technical professional that’s responsible for performance has a couple of characteristics we can play on. One, they have some amount of budget they can deploy without asking for approval. That’s important in our model. Every product we sell has an entry price point below $5,000 because every IT pro has $3,000-$5,000 of procurement authority where they don’t have to ask for approval.
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We also believe that technical professionals in the performance management space are inquisitive, they’re out on the web on a constant basis looking for content, looking to have conversations with others trying to solve similar problems, and looking for products to help.
Given that breadth, who do you compete with?
We compete with a bunch of very small vendors and the world’s largest vendors. We believe we have an advantage against all of them. Against the bigger vendors, we think our products are just better and they’re much less expensive; typically 70%-80% less. With the smaller vendors, we’re typically on a par with their pricing, but we have much more technology, we scale much more effectively.
And we serve the smallest companies in the world to the largest companies in the world. My 30-person dental office here in town uses our product to manage the performance of their network because if their network goes down they can’t see a single patient because everything is electronic now. They use the exact same network management product from us that Nike uses, that the U.S. Army uses.
When did the company go public?
We went public in the worst market in the history, in May of 2009. We were the first software company to get out in over 12 months. The reason we were able to get out in a really bad market is because we were both growing fast and we were incredibly profitable. We’ve always been the most profitable company of our size, and always one of the most, if not the most, profitable public software companies AND growing fast at the same time. On a percentage basis, we’re more profitable than Oracle and have been for a number of years.
The obvious follow up question, then, why go private?
Coverage is one. We weren’t looking to go private. I wasn’t out there trying to find somebody to take us private. We got inbound interest. It was unsolicited and that inbound interest was at a high enough premium to our trading price that we needed to at least consider it. Once we considered it as a board, we reached the consensus of opinion that, given where the stock prices were at the time, and how the market would require us to grow our valuation over a two or three-year period of time, it made sense to explore the opportunity.
As a management team, we were open to it both because of the evaluation and because what we do really well is grow fast at a very high level of profit. We don’t maximize our growth. We set a profit target and we maximize our growth at that profit target, and we believe that’s the best way to build a great company. The public markets don’t reward that very well. They just want you to grow fast at all costs, and that’s not what we wanted to do.
We always believed after we went public that we weren’t getting the level of credit we should for our ability to grow at a high rate. Not the highest rate, but to grow at the highest level of profit at a high rate and build a great business that will be here for the next 20, 30, 40 years. That’s hard to do as a public company, having people watch you through a glass window while you do everything. That’s why as a management team we were open to the conversation, coupled with the fact that the initial interest was at a high enough value that we felt like we had to consider it.
It is never an easy decision to go private because it’s a change in the strategy and course you were on, and ultimately you need to get 100% alignment with your board and your management team.
If I understand it right, you were about $550 million in revenue when this happened and taken private for $4.5 billion?
Almost $4.6 billion, a little over a 50% premium to our trading price before we got the initial inbound interest.
What did you have to give up for that?
The way the ownership of the company is structured today is Silver Lake Partners and Thoma Bravo each own 50% of the business, at least initially. They will end up each owning, fully diluted, 46% because about 8% of the company is going to end up in the hands of employees and management. We’re in the process of doing that right now.
They have equal representation on the board. They have equal decision-making authority and they obviously will make the decisions. In terms of what we give up, we gave up a lot of cash because it’s a leveraged buy-out, take-private transaction. We had a bunch of cash on the balance sheet and a lot of that is gone because they used it to lower the amount of debt and equity that they had put into the company.
However, we are cash-flow-positive every day of every quarter of every year, so we’ll put that cash back on the balance sheet pretty quickly. We do have debt now and so we’re going to have to pay that debt off. That removes a little flexibility on making acquisitions for cash. However, we still have flexibility because it doesn’t take even close to all of the cash we’re generating to service the debt.
In addition, we have the ability to borrow more money, and we gain two partners that have a meaningful amount of equity dollars set aside. If we find the right strategic acquisition they can help us grow faster at a high level of profit. So we’re able to look at things we couldn’t look at before. Before, I couldn’t look at any acquisition if it wasn’t going to grow at least 25% in revenue year over year. But there are things strategically we should own, that we should be providing, that may not be able to grow 25%. Maybe it will only grow 10%, but it’s a piece of technology that solves a problem for our customers and it creates a deeper relationship with them. If you’re a public company you’ve got to be willing to take a bit of a beating when you make an acquisition like that, and sometimes that’s a hard decision for a board to make, so we got that added flexibility.
Are the new board members second-guessing everything you do?
We are fortunate in that both Silver Lake and Thoma Bravo, even though they had not worked together before, have a similar view in that they invest in companies and in management teams they think are great and they don’t bring in their own management.
They don’t want to second-guess the existing management. Our company wasn’t broke. We were growing fast and we were growing fast at a high profit, so we weren’t broken. We just made a strategic decision to be private for a while. Odds are we go public again someday. Whether that’s three years, four years, five years, we probably will become a public company again, and we’re going to become a public company at a much larger size and at an even higher level of profitability than we were before.
They’re not second-guessing what we’re doing. However, they have a lot of smart people that work for them we can choose to leverage as we need them. They’ve got some great operating partners, some of whom come out of our space and are very, very technical, and I have already been able to leverage them to both help me hire some new executives where I had some gaps, and use them as a sounding board to make sure I wasn’t missing anything.
You said they approached you guys. Did you consider others?
Yeah, we did. In fact, they did not approach us together. We were approached by one private equity firm. We looked at it, said it was good but not good enough. Once you get an offer that’s high enough you’ve got to see if you can maximize existing shareholder value, so we hired a banker at JP Morgan to work with us and we went out to see who else might be interested in the company. All the largest private equity firms were very interested. We were fortunate everybody wanted to be involved and they were very aggressive in the process.
I imagine there was apprehension on your part when this whole process first started?
I wouldn’t say we embraced it from the get-go. There was definitely some level of apprehension. You want to make sure you’re making the right decision for the company. You want to make sure you’re making the right decision for your employees. As a public company CEO, I had a board, but a public company board and a private equity board are very different in terms of level of involvement and it’s mainly because of level of investment.
These guys wrote, between the two of them, a $2.5 billion equity check and when you write a $2.5 billion equity check you’ve very involved in what’s going on. I knew we were going to have a more involved board than my public company board, which are a bunch of guys that had been with me a long time.
Without a doubt we considered it carefully, we looked at both the pluses and minuses of staying public and going private. Some of that was the timing of the public market and what we believed the volatility of that market might be, so we considered all that very carefully. And then as we went through the process, we got to know the partners of the private equity firms so we would have some feel as to what it was going to be like to work with them.
It was the first time I went through a take-private transaction, but I think we did it about as well as anyone could. It’s one of the largest software deals ever done on the take-private side, and one of the highest premiums. I think the process was a good one. We got a great value for our shareholders. We got really great partners and, while they know they paid a high price, they think we’re going to make them a lot of money in the end and we believe we will also. But to say we didn’t have any apprehension and weren’t nervous about it would be a lie because we had never been through it.
You mentioned a likely exit strategy, but why go public again?
It’s the most likely exit strategy, and there are really two reasons for it. One, we’re a private company with $6 million dollars. The next exit is going to have to be at a meaningful premium to that in order for our investors to make the kind of money they want to make out of this transaction, and, to be frank, for my management team to make the amount of money we want to make in the next phase of the company’s growth. The valuation is going to be very high by the time we get to the point where we’re ready to go public. We’re going to have revenues probably in the billion-dollar range at that point and be delivering $550 million or more in cash flow. Our valuation is going to be high.
Also we’ve got a unique business model, one where we go to market in a very different way from all of our large competitors in this space. In order for someone to buy us, they’re going to have to be big, they’re going to have to have a lot of capital, they’re going to have to embrace the uniqueness of our model, and they’re going to have to be a brave enough to know that our model will potentially commoditize and infect the rest of their business. That company might be out there, but it’s more likely that we end up going public again.