Why Going Private Is the New Black

Earlier this year when Michael Dell announced plans to turn the company he founded private along with the help of Silver Lake Partners, it got Tom Lounibus thinking. He runs Soasta, a Mountain View, CA cloud-based applications development firm that among other things is helping the organizers of next year’s Olympics in Sochi, Russia. In a blog last May, the veteran CEO who took two companies public, wrote, “Going private is the new black.”

He sees seismic shifts in tech that seem to be picking up steam. The current shift, driven by an ever-growing mobile/social media world, is of such magnitude that even Silicon industry veterans like himself haven’t seen it before. Disruption, he argues, is being experienced at every level of the technology food chain (user, device, network, infrastructure). Older business models (in tech “older” is relative) are beginning to show their age. They need to evolve or they will perish. Such evolution is today best done in private, away from the glare of public scrutiny and investor impatience. Innovation is a messy business.

It’s a strategy that’s been out there for a long time, “ he says, “but when you are forced to change your DNA the change requires more changes, more layoffs, more acquisitions in a shorter period of time. Because It’s simply harder to do this, more CEOs have come to the conclusion that it is better to do this when you don’t have to expose every detail in public where one has to face severe ups and downs of the public market.”

There is a seismic shift afoot with enterprise software vendors as they move from traditional pricing and distribution models to OpEx, SaaS and cloud models. This means financial disruption for many of them,” says Dana Gardner, principal analyst with Inter-Arbor Solutions. This is why BMC closed a deal with two private equity firms worth $46.25/share in cash or $6.9 billion.

Lounibus says he wouldn’t be surprised if Compuware, CA, or even HP would entertain such a move. Keynote Systems, an internet monitoring firm sold itself to private equity investment firm Thoma Bravo, LLC in an all-cash transaction valued at approximately $395 million, thinking it would be a lot better to go from a quarterly view to one where a firm has five years to undertake its transformation. “Meg Whitman has to deal with employees whose HP stock has cratered,” adds Lounibus. “Customers don’t like it and investors don’t like it either. I bet she is thinking about the private option.”

IBM made the transition from hardware to services at an earlier time when customers, and investors were more forgiving. And to IBM’s credit it did it 15 years ago and much more smoothly than companies today.

But disruption knows no industry bounds. Berkshire Hathaway and 3G Capital are spending $23 billion to acquire HJ Heinz in what is said to be the largest acquisition in the food industry. Troubled retailers Best Buy and Barnes and Noble have been mentioned in various reports as considering going private. At the root of most of this market disruption is the continuous massive move to Internet technologies, mobile and cloud in particular. Total online business now represents $2 trillion.