The Return of 1990’s Software IPOs


The software IPOs of the 1990’s are coming back – you heard it here first. That’s right, the old school enterprise software companies will be doing IPO’s starting in Q4 and there are a bunch of them. In some cases it will be new companies that look just like old enterprise software players and in many cases it will actually be the same companies that did IPOs in the 90’s and take-privates in the last 10 years.

Don’t believe me? Well consider a few facts. While it is true that the high organic growth rates that fueled the IPOs of the 90’s have permanently disappeared – it is also true that we dramatically under estimated the lifetime value of a customer. If you were there in the 90’s, then you remember telling software CEOs that public investors would place ZERO value on their maintenance streams. Growth investors wanted growth and it was all about elephant hunting for the next big license sale.

Measuring companies strictly by their new license sales was OK – there were plenty of customers ready to throw money at more software – as Tom Seibel proved. Of course all good things must come to an end – and so it was that the seemingly endless corporate appetite for purchasing software came to an abrupt end on about December 2000.

Now like any herd, the enterprise software industry was hard to divert (as were the sellside and buyside research analyst). They had enjoyed had too much success building new products, hiring expensive sales people and hunting big bucks – that long after the customer had said “no mas” – hundreds of software companies (many VC funded) continued to burn money with this business model.

But there are always the practical visionaries who can recognize a paradigm shift. Those who could see that no matter how many salesmen were hired – that the customer has enough software already. These visionaries understood that it was time to stop wasting shareholder money on chasing revenue that wasn’t there.

These same visionaries recognized that all was not lost because there was great value in an existing customer who relies on your software to run his business, who never wants to buy new software again and is willing to mail you a big check every year. This is particularly good news when the customer is OK with you making over 25% EBITDA margins on maintenance.

Here’s to switching costs!

Quietly over the last 6 years, leading private investors such as Francisco Partners, Golden Gate, Silver lake, Hellman and others have put together portfolios of these 90’s darlings. Companies like Attachmate, Infor, Kronos and SunGuard. There are literally dozens of these companies that have been reconfigured to capture modest new customer growth while vigorously defending existing customers with an improved focus on service and product enhancement. 

The typical financial profile would be over $100M in revenue over 80% of which coming from exiting customers – over 60% is contracted – delivering 25% EBITDA margins. Growth is only between 5-10%, but very predictable.

“So what” you say, how can these slow growing boring companies be attractive public investments? GA tried it 3 years ago with SSA 3.0 and investors weren’t to enthusiastic. Old patterns die hard – often for good reason.  But lots of things died in the meltdown. As I look around I see “low risk” investments like T-Bills exposed to negative yields with even modest inflation, I see high potential but risky companies that seem….well RISKY, I see real estate and I run, and I see established “safe” companies priced high because safety is in short supply and high demand.

Sounds like a good opportunity to sell 10% rock solid growth, steady 25% EBITDA margins and very clean balance sheets.

PS:  Check the LBO bankruptcy list for any software companies. Despite deals that went down well above 15x EBITDA – you wont find any.

Coming Q1 2010 to a broker near you… Return of the Enterprise Software IPO in 3D!

Chris is the founder of Bulger Capital, before which he spent three years at Needham & Co. as a senior partner and head of technology banking. He also is a Robbie Stephens vet, having run its Boston office and its global technology banking group.

Read Chris’ earlier posts here.