Today, Informatica announced that it has agreed to be acquired by international private equity firm The Permira Funds and the Canada Pension Plan Investment Board. The all-cash deal, which values Informatica at US$5.3B, takes the company private. Private equity takeovers are as rare as white tigers in the IT market with mergers and acquisitions with other tech companies more common.
The most recent (and dramatic) exception was Dell which was driven by founder and CEO Michael Dell. Like Dell, taking Informatica makes infinite amounts of sense. The conversion of revenue from one time capital expense to subscription based services is making it hard for technology companies, especially software companies, to meet the ever increasing expectations of Wall Street and global public equity markets. The constant pressure to show quarter over quarter growth in revenue and profits is out of sync with the investment cycles of technology companies. Technology based companies, like all companies that rely heavily on R&D, need to make investments that may not pay off for months or even years. It’s not like typical investments in capital goods, such as machinery, that start paying off soon after they come online. Intellectual capital needs time to develop into revenue and the short term desires of public equity markets is too impatient for this type of development.
Another reason is the culture of technology companies. Technology companies, founded and driven by engineers and developers, work best when the environment is collegial and open which is anathema in public companies. When a company goes public, every initiative needs to run past lawyers and accountants, slowing down progress and closing off conversations.
Informatica especially seems like a company that will do better as a private venture. From the CEO, Sohaib Abbasi, down you get the impression of a more relaxed, open, and patient organization. They seem the opposite of public company culture. It’s not that Informatica isn’t competitive, just not cutthroat. There is a willingness to let a line of business take the time it needs to develop. That’s hard to manage with Wall Street analysts breathing down your neck.
There is a big question though that hangs over Informatica now; “What will be the investment strategy?” Private equity companies tend to take a number of paths. First, and least common, that of the patient investor who allows the company to reach its next level outside the glare of Wall Street. These companies eventually go public again but as much stronger companies. Second, they can become the base for an aggregation strategy. The acquired company then goes on an acquisition binge buying up lots of complementary companies and emerging as a much bigger and more integrated entity in the market. Finally, a breakup. Popular with the large and distressed conglomerates of the 1980s and 1990s such as Tyco, these are unusual in the technology sector. Informatica doesn’t have enough discrete components that could be spun out profitably for this strategy to work. They are too big to be the basis for a roll up or similar aggregation strategy. They could use some acquisitions such as a data analytics company but that’s to fill out their product portfolio. Hopefully, the strategy will be the long term one, allowing Informatica to make patient investments and precise acquisitions that drives long term value.
Unless something dramatic happens, Informatica will be soon move from the public markets to being a private company once again. How they will emerge ten years hence is anybody’s guess. Hopefully they will be a better and even stronger version of themselves.