Off topic, but can you tell me more about the issue with being taken over by a private equity firm? I work for a 10k employee company who will be taken off stock exchange and sold to a Chinese equity firm.
Typically, PE companies buy the company while only putting down a small portion of the purchasing price. They finance the rest through banks. The whole concept is pretty similar to buying a house with a mortgage, except you're buying a company. The debt payments are then a tax write-off, and all/most available company cashflow is diverted to paying off that loan. The ideal company is one with reliable cashflows and access to a growing market (of which I'd say a large cloud infrastructure provider fits the profile).
To improve cashflow: pay fewer people less, convert assets to cash, and/or make more money from your core business. Usually a mix of the three.
From an organizational standpoint, you can think of it like Rackspace just took out a very large (maybe subprime) mortgage on the company and some new people are going to try to make sure that doesn't turn out to be a horrible bet, first for the investors, then for the company.
What if the people that got the mortgage for the house just want to make it pretty an resell it? I guess that's the fear here, when the buyer is an investment company (house flipper) and not a technology company that wants to increase their market share or add technology / talent to their portfolio.
What do PE companies do with more than one company with kind of dated offerings in the same/similar niche?
Reduce the fat, merge them and sell them to a large company?
E.g. Qlik, Riverbed and Dynatrace https://thomabravo.com/portfolio/all/current/
This works in the PE world because these are businesses that have credit and can get debt financing. The typical VC backed company can't get debt financing because they are too risky (early stage) for a traditional lender. That basically but an end to that VC's plan.
Other firms, like Texas Pacific Group, are turn around specialists that take struggling firms and fix their business processes to make them run better and raise the stock price by actually building a better company.
There are a lot more of the former than the latter, mainly because it takes some uncommonly smart people to run the latter kind of fund and just a bunch of bean counting jerks to the run the former kind.
So... this is not good news for the customers of Rackspace.
The real question is of "strategy", not "values", in the financial industry.
Anyone have a tl;dr for Apollo on that?
[1] http://www.streetinsider.com/Corporate+News/Apollo+Global+to...
Most exits in PE are either going public (in which case you have to convince the equity markets that the company is stable), selling to a strategic buyer (e.g., if Apple were to buy RAX from Apollo), or even selling to another PE firm which happens all of the time.
The point is that neither of these scenarios turn out well if you are levering a company up to an unsustainable capital structure.
A good book to read on one of the most notorious examples of an LBO is Barbarians at the Gate [1][2] which dealt with the takeover of RJR Nabisco, a large American food and tobacco company.
For lighter fare, re-watch the 1990 movie Pretty Woman [3][4] but this time ignore the fluffy romance and focus on Richard Gere's character, Edward Lewis, as he goes about negotiating the LBO of a shipbuilding company. Edward Lewis was modeled on a real-life LBO guy, Reginald Lewis, who bought Beatrice International Foods from Beatrice Companies in 1987 in an LBO worth $985 million [5].
[0] https://en.wikipedia.org/wiki/Leveraged_buy_out
[1] https://en.wikipedia.org/wiki/Barbarians_at_the_Gate:_The_Fa...
[2] http://amzn.com/0061655554
[3] https://en.wikipedia.org/wiki/Pretty_Woman
Then the asset stripping begins.
2. You also need someone to put up the initial equity capital.
3. You need to find a viable company to be acquired that won't crash immediately upon acquisition, and it can't be too expensive. Your first goal is to recover your equity investment. Everything after that is basically profit.
4. Frankly, 99.9% of people have ethical issues (you risk the jobs of 100s of people by overleveraging) with PE deals or don't have the skills and/or intelligence (managing the financial side + running/growing a business is hard) to be able to execute a deal like that.
If all you care about is making money, then private equity is probably one of the "easiest" ways to build wealth (for yourself, that is). At the end of the day, it's nothing more than buying a companies with a huge loan. There are some billionaire entrepreneurs who have used LBOs as their "empire building" tactic, i.e. Rupert Murdoch, John Malone, etc.
Also, check out Amaya Gaming. Classic LBO play done by an entrepreneur.
Why do banks love PE deals? Easy: they make a ton of money off of these deals, with moderate risk. If the business goes under, they are first in line to be compensated. If they make 4% on a $500m loan, that's $20m a year.
http://www.nytimes.com/2009/10/05/business/economy/05simmons...
Basically, in theory the best way to make money is to serve your customers well. But in practice, financial engineering creates a lot of opportunities where those diverge. This is hard on employees, who value non-financial things like stability and meaning in their work.
Private equity groups don't make money from holding businesses, typically. They make the serious returns when they sell a business to a larger company. Keeping expenses low increases margins and drives the best returns.
The problem is that PE management aligns with short term incentive, which is especially difficult for a tech company where value is often derived from high investment into new and emerging technologies.
That or it was just a way for Vivek Ranadive to get the maximum payout for his equity stake so that he could focus on running his NBA team.
As a side note, I went to the annual TIBCO conference right before the buyout and it was pretty clear there that Vivek didn't give a wet rat's rear about TIBCO or software anymore and just wanted to spend his day being an NBA owner.
The late 80s were definitely a different time, though - the amount of money needed for the RJR LBO is much more easily accessible to people in similar positions in 2016. As of June 30th, KKR's AUM is $131B, while Blackstone is at $356B.
Another good read on PE is King of Capital (https://www.amazon.com/dp/0307886026).
If you're interested in learning the technical details of corporate finance, you're probably best off starting with something like the Coursera class Introduction to Corporate Finance (https://www.coursera.org/learn/wharton-finance), and then reading the textbooks referenced by the course for a more in-depth understanding.
In my experience, it was painful because a small highly technical organization was smashed onto a huge sales-centric company. The cultures were not the same at all. It wasn't horrible and I wasn't there long enough to benefit from anything (the Berbee founder gave some ownership to people who had been there longer -- my stay was brief during and after college so it was fine by me). But the resulting company wasn't as interesting to work at and today many of the people I knew who worked there moved on to other competitors in the local market. Nothing wrong with change but it was an awesome company before the merger.
So you might expect in the future to be merged with a company that looks good on paper but is painful in practice. But of course from the PE viewpoint, the point is to make money so as long as that happens, it's a win. It's just their interests are probably not aligned with yours.
Personally, I fall into the group that thinks private equity is probably bad for the economy in general.
They now have to find extra profit to pay the interest. Ideally they also get a healthy dividend or management fee every year.
This inevitably comes down to a. increased sales b. cost (i.e. salary) cuts
They also want to resell/IPO the company in 3-7 years - obviously for money than they paid for it. This is another constant pressure to increase profit (see a & b above).
HOWEVER Growing companies are usually not for sale and are very expensive. They cant be bought by PE. PE often looks for a troubled company which can be bought on the cheap, and can be somehow be kept profitable for a few years.
Hence (a) is difficult leading to focus on (b)
This of course is not all bad. Some academic studies have shown that PE companies do grow over time. The new management can trim the middle management roles and invest more in real r&d and product. YMMV