Private Equity Investment in the Information Industry: Customer Benefit or Concern?
By Richard P. Hulser
Financial investors noticing these advances are gaining major influence through their industry investments. The amount of money available in the form of “cheap debt,” which enabled investment companies to make deals that often made headlines, had an impact on all industries, including ours. Over the past few years, there have been increased and significant investments by private equity firms in library systems companies, publishers, and others providing electronic tools and content.
You might be saying, “So what? Why should I care about this? Is this something that matters to my organization or to me?” The short answer is “yes—it should and it does.” A key question: What impact does this funding have on the short-term and long-term products and services needs of information managers and librarians? As customers of companies being funded through various kinds of investment strategies, particularly private equity, librarians and information managers should be aware of how such investments can affect their operations, budgets, and strategic planning. It can be a good thing, to be sure, but there are also cautions you should consider.
INTRODUCTION TO PRIVATE EQUITY
Two terms frequently appearing in news releases are “private equity” and, related to that, “venture capital.” According to Private Equity Info (www.privateequityinfo.com/private-equity-firms.php), private equity investors buy, improve upon, and sell businesses in an effort to make money from the cash flow the businesses produce and from the capital gains received upon the sale of those businesses.
Venture capital is a type of private equity, usually used to fund startup and very early stage companies. Many of the internet startup companies in the late 1990s were funded this way. Other types of private equity include leveraged buyouts, which are used to take over a company in whole or part, and mezzanine debt financing. [For a comprehensive overview of private equity from the researcher’s perspective, see Janet Hartmann’s article in this issue titled “Putting a Public Face on Private Equity,” pp. 14. —Ed.]
Impact on Publishing and the Information Management Industry
A number of large private equity investments are being used to re-energize established businesses. Many publishing companies and library systems vendors, ones that have been around for years, fall into this category. Private equity funding focuses on significantly expanding product development, marketing and sales, and other aspects of a company. The expectation is that the company will, in turn, gain significant value and then be sold in a few years (typically 3 to 5 years) at a substantial profit.
Private equity companies have targeted a number of publishers integral to providing important content to libraries and their clients. Kate Worlock, a director at Outsell, Inc. (www.outsellinc.com), lists a number of private equity firms that have invested in publishers in her August 2007 report “The Impact of Private Equity on Information Markets.” For example, Candover and Cinven made major investments in Springer in 2003, while more recently (May 2007), Apax Partners and Ontario Municipal Employees Retirement System (OMERS) Capital Partners bought Thomson Learning, now known as Cengage Learning.
Major acquisitions of library systems vendors by private equity companies occurred in 2006. Marshall Breeding notes in the April 1, 2007, issue of Library Journal (“Automation System Marketplace 2007: An Industry Redefined”; www.libraryjournal.com/article/CA6429251.html) that private equity investment and open source software support has created a redefinition of the library automation industry. Private equity firms now own many of the major players providing integrated library systems (ILS). After years of steady but slow advances in their products and services, this has shaken up the ILS arena with the resulting number of mergers, acquisitions, and reorganizations that caused curiosity as well as concern for customers.
Breeding cites Ex Libris’ acquisition in July 2006 by Francisco Partners a large, technology-heavy private equity fund. Later in November of that year, the same company acquired Endeavor from Elsevier, sending some shock waves through the customers of these companies as the future of the respective product lines were unclear. Customers wondered: Would the products all be merged together? Will current products continue to be available for the foreseeable future? What kind of technical support can be expected? Similarly, Vista Equity Partners acquired SirsiDynix in December 2006 while its merger of the Sirsi and Dynix product lines was still under transition.
But these aren’t the only examples. In a related area to the ILS vendors, Infotrieve, a major player in document delivery services, has been funded through venture capital for several years. Recent funding of $21.8 million was obtained in 2004 and another $5 million in 2006 from Trident Capital and other firms.
During 2007, the subprime housing market problems began to have an impact on the availability of investment money. However, many deals continued to occur. In December 2007, Inmagic received $5 million investment from a single investor, Edison Venture Fund, with a focus on expanding product development among other objectives.
Benefits and risks to customers
So is all this news good for the information industry and information professionals? Yes—it can be interpreted as vindicating our belief that what we do is important since there is so much interest in funding the products and services we use. At the same time, we need to watch what is going on very carefully because the products we expect to always be there and upon which we base our services to clients may or may not exist or meet our needs in the future.
In their June 6, 2007, article in Network World, Tim Greene and Phil Hochmuth (“The Avaya sale: Tech buyouts bear risks for customers, too”; www.networkworld.com/news/2007/060507-avaya-buyouts-customer-risk.html) talk about how private equity buyouts can be risky for customers. They mention that such deals may be good for investors but not necessarily so for workers and customers. Decisions on product development and areas to strengthen may be more in the interest of the investors and their future financial gains than particular product lines or services.
Another point covered is that a business often has many operational problems. Very few private equity people have experience or understand how to run the day-to-day operations of a business. Rarely have they actually run businesses, and they have likely never dealt with profit and loss, so their experience in essential daily operations could negatively impact a company if the executive management of the company is no longer in place. This could result in the invested company not adequately addressing their customers’ needs.
Private equity investment brings with it benefits and issues.
Benefits of Private Equity Funding
The company is no longer under public stockholder scrutiny. Without the pressure of quarterly financial reporting, it can do things public companies have a tough time doing. This can be a huge benefit to customers who have been hoping for new or significantly enhanced products.
The company can be reorganized to be more efficient and more customer oriented. Strong short-term investment in product development can occur, and a significant increase in marketing can be put in place to strengthen awareness of what the company has to offer its customers.
It is easier to purchase other companies, to broaden or to deepen the products and services offerings of a company, thus generally enhancing its capabilities and providing a variety of offerings to customers.
The company is made more valuable for eventual sale, which also infuses confidence that the company will be successful in the long-term, making it a benefit to customers as well.
Issues of Private Equity Funding
Deals often load a company with a large, short-term debt.
Technology or other kinds of development could be limited because funding goes to another area.
Mergers of products or services could significantly reduce or eliminate those of most interest to a particular customer segment. For instance, a company with library system software that has a special libraries customer base may be swallowed up into a larger company that is focused on public and academic libraries, leaving the special library to either accept a product that has dim prospects for meeting future needs or to migrate to a different product that has better future possibilities.
WHY YOU SHOULD CARE
Let me get back to the question of why you should you care. This kind of investment will influence the products and services available to you to support and enhance your own operations. If you are responsible for buying products or services from one or more of these companies, a number of things could happen. More of what you need could be made available sooner, which is a good thing. However, pricing structures could significantly change, and with that, much higher prices for those same products and services could be put in place. This has been seen with a few of the large publishers who have imposed different pricing structures on electronic publications, sending prices significantly higher than they were before a merger.
Needless to say, this directly impacts your budget plans for the short-term, and it likely will cause a need to rethink strategic plans. So, what should you do?
A lot of planning will depend on how concerned your department or organization is about risk. Some companies thrive on using the latest, greatest things. They are fine with taking the risks involved with changing to another product or service when necessary. Others have little to no risk tolerance. They don’t want to bet their businesses or their fragile budgets in areas where it could cost them more in time and money to recover from significant product availability changes.
Depending upon your situation, it is generally a good idea to have contingency plans whenever possible. This is a good business practice, but it is even more important in this time of many changes and uncertainties in the marketplace. If you can obtain products or services from more than one source, that is a good start and should be duly noted. For instance, a merger of library system vendors may provide access to more solid product development and an expansion of the capabilities of the product you have in place. However, it could also result in enhancements that you no longer need as high-priority, if a priority at all. This could require you to seek another library system or perhaps eliminate the need to keep one altogether.
It is wise to keep abreast of source alternatives and perhaps even have a full backup plan that you can put in place on short notice, whether that is a few weeks, a few months, or even a year. This will ensure that you are in a position to have the best deal and to avoid interruption of services to your department or your clients.
While all these things can happen with products and services from publicly traded and privately owned companies, it is a good opportunity to examine how best to deal with the issues that may result with the many vendors of information products and services funded through private equity.