The Allure of Going Private


By Steve Rosenbush The dream of going public may be losing its luster. For generations, business owners have longed to sell shares to investors. As shareholders bid up the value of the stock, the companies gained capital to expand and invest. That has been particularly true for tech outfits, where entrepreneurs and venture capitalists literally manufacture companies for launch on the equity ocean.

But the dream shows some signs of changing. Case in point: On Mar. 28, SunGard Data Systems (SDS) announced it would sell itself to a group of private-equity firms for $11.3 billion. Cristobal Conde, SunGard's president and chief executive, explained that growth opportunities seemed greater as a private company.

"When you're running a public company, you have to make trade-offs between short-term quarterly earnings and long-term investments," Conde tells BusinessWeek Online. "We'll still have to make those trade-offs, but we can favor long-term investments to a greater extent in a private setting."

GREATER SCRUTINY. The deal comes at a time when publicly traded companies are under increasing pressure. Several years of scandals at leading corporations led to the Sarbanes-Oxley Act, which requires executives to submit to tighter accounting regulations and reporting requirements.

Sarbanes-Oxley has made it more time-consuming and expensive to function as a public company. And the executives and directors of publicly held outfits face greater scrutiny -- putting them personally at risk if things go wrong -- from regulators such as the Securities & Exchange Commission and New York Attorney General Eliot Spitzer. The new responsibilities add to the growing sense that status as a public company means a lot more hassles than it used to.

More important, the drawbacks of being private aren't necessarily as great as they once were. Companies have long gravitated toward public markets so that they can raise capital. But the private-equity markets have attained sufficient size to serve the capital needs of ever-larger companies.

IN FOR THE LONG HAUL. Big, multinational players like GE (GE) always will need to raise money in the public markets. But for a big company like SunGard, whose 2004 revenue came to $3.56 billion, the private-equity world offers plenty of opportunity. The new owners, led by Silver Lake Partners, include an all-star cast of supporting players: Bain Capital, Blackstone Group, Goldman Sachs Capital Partners (GS), KKR, Providence Equity Partners, and the Texas Pacific Group. It would take a long time for SunGard to outgrow the resources of those deep pockets.

The access to capital will allow SunGard to make more acquisitions as part of its growth strategy. "This company had a good track record of buying smaller companies," says Silver Lake's co-founder and managing director, Glenn Hutchins, who adds that his firm isn't looking for a quick exit: "Like all of our investments, we intend to hold this for a long time."

The workings of the private-equity markets have changed, too. While these investments have generated enormous returns over the last few decades, they've become more modest in recent years as the industry has matured. As a general rule, private-equity firms specialized in buying smaller and midsize companies and industrial divisions, turning around faltering operations and making outsize returns.

NEW STRATEGIES Returns of 40% or more were common in the 1980s, and returns above 30% or more were the goal in the 1990s, according to industry veteran Gwyneth Ketterer, chief operating officer of private-equity player Bear Stearns Merchant Banking. But targeted-return percentages have dropped to the 20s in the recent years. She cites two reasons: The companies getting bought are more expensive, and buyers must put a higher percentage of private equity into their deals.

Plus, the venture-capital industry is growing more competitive. The number of private-equity firms has increased over the years, as stricter regulation and weaker returns in the stock market forced investors to seek alternatives. Competition has intensified, with more players on the field even as margins erode. For that reason, private-equity firms have had to develop new strategies to make money, such as teaming up en masse to acquire larger and larger companies.

The track record for high-profile private-equity deals is mixed, however. The 1989 RJR deal, still the biggest of them all, was a relative flop. It took years to achieve a single-digit return from the debt-laden company. But private-equity giant Blackstone had a hit this year with the initial public offering of German chemical company Celanese (CE).

DEMANDING OWNERS. How will SunGard fare? Based in Wayne, Penn., it reported profits of $454 million in 2004. A software maker specializing in servicing finance companies, its revenue base -- $3.56 billion in 2004 -- is growing at 14% a year. It plans to boost that rate by acquiring smaller companies and ramping up sales of existing products. "Our largest customer, JPMorgan (JPM), is underpenetrated when it comes to the number of products and services we provide it," says Conde.

It's far too soon to know whether the deal will succeed. But ownership by seven of the world's leading private-equity firms surely will pose its own set of challenges. The partners are bound to be demanding owners, and if their interests diverge, problems will ensue.

"It would be naive to think this will be easy," says Conde, who has a BS in astronomy and physics from Yale. Yet he's no stranger to forging new paths. And with his latest move, he's once again a pioneer in what many expect will be a growing trend. Rosenbush is a senior writer for BusinessWeek Online in New York


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