Technology Buyouts

Sebastien Callebaut -

Slowing Growth Is Pushing Tech Companies To Sell Themselves

Private equity firms have heaps of capital at their disposal but rising financing costs now makes it increasingly difficult to close acquisitions. Software had been a particularly hot sector before the slump due to its consistent cash flows.

  • Thoma Bravo LP and Anaplan Inc. reached a $10.7 billion agreement in March which was subsequently renegotiated
  • In January, Citrix Systems Inc. was acquired for $16.5 billion by Vista Equity Partners and the private equity division of Elliott Management Corp

Zendesk Is Next

According to sources familiar with the matter, Zendesk Inc. is close to reaching a deal with a group of buyout companies, reviving a failed attempt to sell itself in what would be one of the largest private equity takeovers of the year.

  • Assuming the negotiations don't break down, an agreement with a consortium that comprises Hellman & Friedman LLC and Permira might be reached in the next few days
  • Zendesk, which reportedly has over 160,000 paying accounts and about 5,450 workers, specializes in assisting businesses with customer communications

The company, which started in 2007, still manages to grow at around 25% year over year while gradually improving its gross margins and reducing its operating expenses.

Stable Cash Flows, Decent Growth, And Measured Risks

Tech companies frequently experience rapid revenue growth but minimal cash flow due to spending on expansion plans. After some years however, growth slows and valuation normalises, attracting hordes of PE firms in need of deploying cash.

  • Buyout firms then have an advantage compared to other players as they are less hindered by regulation
  • And instead of relying on a depositor basis like commercial banks do, private equity firms are able to raise debt from institutions which invest with them
  • They claim that by doing this, the larger financial system is protected from potential losses if particular trades don't work out

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Berkeley Communications on Unsplash.