Activist Investors

Note: Gary Spivak contributed to this blog.

There’s been a lot of activist investor activity in the networking space over the past few years, including Juniper, Riverbed, Citrix and several others. This concerns many Gartner clients, and rightfully so. There will be gloom and doom in the press, meanwhile, your vendor will tell you everything is rosy….the answer is likely in the middle.

There are several situations that can stimulate private equity (PE) firms’ interest in buying a publicly held company, including:

• A company’s public stock price is significantly below historical values.
• Mismanagement and ineffective strategies have undermined the company’s assets.
• The company has a lack of revenue growth, accompanied by strong cash generation.
• The company has the potential to sell certain divisions.

Activist investors focus on making money and seeing the share price increase.  However, even when successful in this regard, they create uncertainty and may push for changes that are not in the best interests of IT leaders. If your vendor is acquired by a private equity (PE) firm, this causes immediate changes to the vendor’s financial condition, and results in restructuring that could potentially impact investments in key areas. The resulting entity is “saddled” with the enormous amount of debt used to finance the transaction. This requires cash flow to remain strong, which could impact your vendor’s investment in key technology areas. However, the vendor will likely portray the changes as having a positive impact. As a result, IT leaders need to determine:

• Whether a vendor’s strategic direction remains consistent with their own. In other words, are you using products/services that are highly strategic (i.e., top 2-3) to the vendor?
• Whether a vendor’s product roadmaps are timely and include genuine improvements and innovation
• What’s likely to happen to pricing
• Whether service and support can be maintained at a sufficiently high level

Undoubtedly, these events (and potential events) create uncertainty, but that isn’t always bad. So, use this change to your advantage, because:

• The new owners are aware of the uncertainty created by the transaction.
• New owners also usually won’t have the same level of attention to profit margins that was necessary as a publicly traded company.
• There will be heavy pressure for the new team to hold on to the existing customer base.
• An existing customer is the more profitable because it requires fewer resources than “greenfield” opportunities.

As a result, you can leverage the uncertainty in pricing negotiations with vendors to get bigger discounts. Let the vendor know you are doing homework, not merely accepting their “story.” Be upfront and honest and let them know they’re being re-evaluated, and use that in the negotiating process. My colleague, Gary Spivak has published two research note that dive deeper into these topics, and they are a must-read if you are strategically or financially tied to an IT vendor facing activist investors.

IT Leaders Should Identify the Right Things to Worry About When Their Vendors Are in Transition

http://www.gartner.com/document/3066317

Summary: In a January 2015 Gartner survey, IT leaders expressed concerns regarding capital market transitions, particularly vendor acquisitions and split-ups. However, there may be other disruptions that will be more important indicators of these respondents’ deteriorating relationships with their providers.

How to Re-evaluate Strategic Vendors Acquired by Private Equity

http://www.gartner.com/document/2840319

Summary: When a private equity firm acquires a public IT vendor, the resulting company is likely to have a vastly different financial structure, business model and objectives. In this research, Gartner outlines five best practices that I&O leaders can use to assess the acquisition.