It may not be an epidemic, but it’s getting more common in this age of IT transition for tech vendors to go with private equity firms, either instead of launching an IPO, or perhaps, at least in one case, deferring it. The latest example is Alert Logic, a Houston-based “Security-as-a-Service” company, which is selling a majority stake to New York-based private equity firm Welch, Carson, Anderson & Stowe, which once owned Savvis, now part of CenturyLink.
In an interview, Alert Logic CEO Gray Hall said the PE firm is buying out all investors except Alert Logic management. That makes it payout time for Updata Partners, Covera Ventures, Mercury Fund, OCA Ventures, Access Venture Partners and Industry Ventures. Alert Logic has garnered about $40 million in venture funding over 8 years.
“The typical holding period [for a VC] is less than 5 years and 5 of the 6 firms that invested in us have been in longer than that,” Hall said in an interview.
Alert Logic’s goal is to grow and the money that the PE firm is putting into the company above and beyond the purchase price will help it expand internationally, he said.
The company is already fairly large. It logs about $50 million in annual revenue and 300 employees. “When companies get to our size, usually a strategic competitor acquires them, but in our case we didn’t want to do that. We think it’s still early and there’s a lot of opportunity in this market. Our goal is to grow several-fold and have a business doing hundreds of millions in revenue in what we think is a multi-billion-dollar market segment.”
Competitors include SourceFire, recently acquired by Cisco for $2.7 billion, and Imperva which sell security products as well as managed security service providers.
In the public realm, some big tech companies are also turning to PE firms, in part to shed public scrutiny and the need to meet or beat Wall Street analysts’ expectations. BMC went this route by agreeing to a buyout by Bain Capital and Golden Gate Partners in May. And as we are all too painfully aware, Dell founder Michael Dell teamed with Silver Lake Partners to take his company off the public market. Blackberry is reportedly also considering a go-private deal.
In the case of these big public companies, going private eliminates the distraction and hassle of dealing with stock analysts and shareholders. That is especially true in this period of turmoil, when IT is undergoing a transformation that makes valuing a company difficult. And pulling back from the public markets means they can restructure more freely without so much scrutiny — for better or worse.
But there is a macro reason that startups and public giants alike give private equity a look: there is so much uncertainty in how tech trends will shake out, and many of these companies prefer to steer clear of shareholder-induced pressures. As the enterprise IT market and consumer market are converging, valuing companies gets trickier, especially if management has to stay focused on quarterly earnings versus long-term strategy.
“There is a lack of clarity and in that case the smartest money may be in the private, not the public markets,” said Dana Gartner, principal analyst with Interarbor Solutions and a GigaOM Pro analyst.
“Some companies are just no longer willing to face the slaughter on Wall Street who think, ‘hey we’re just going through a hard time, we’re not dead yet’,” he said.
As for Alert Logic, an IPO remains a potential goal down the road, according to Gray. Just because the company is taking private money now does not rule out a public offering later.