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Tim Green

Informatica’s Buyout Buys Time for Cloud Transition

by Tim Green | Dun & Bradstreet Editor

April 9, 2015 | No Comments »

Cloud ComputingIn accepting a $5.3 billion buyout offer, Informatica Corp. became the latest public company to take its transition to the cloud behind closed doors.

Private equity firm Permira Advisers and the Canada Pension Plan Investment Board teamed up to purchase the data software developer based in Redwood, California.

Like other enterprise software firms, Informatica has been moving its offerings to the software-as-a-service (SaaS) model. And like other software firms — big, medium, and small — its transition hasn’t been as rapid as some investors would like.

It’s not that Informatica has had lousy income statements. It posted more than $1 billion in revenue in 2014, a 10% increase over 2013. And it’s been profitable, if not wildly so, over the past 10 years.

But the company’s revenue from subscription-based licenses for cloud and data-as-a-service offerings, while increasing year-to-year, accounted for just 7% of revenue in 2014.

Cloud computing is rapidly replacing expensive software packages installed at a customer’s site. When companies sell big, on-premise software, they not only get the purchase price, but also fees for installation and service.

In cloud computing, software is stored on servers in data centers. Customers open the software and work with it on their computers or mobile devices with no need to download it. They pay for the software with subscriptions. With this model, the customers pay just for what they use and let someone else manage the back end of the applications.

The switch to cloud computing is not only a technological challenge for the software seller, but its effects extend throughout the vendor’s organization, to sales staff used to commissions on big sales, consultants, and technicians.

Big companies have so far had the resources to invest in cloud computing and survive the ride through the no-man’s land of reduced revenue until the cloud starts to pay. But even some of the giants (SAP, IBM, Oracle) have had to contend with concern their cloud computing revenue isn’t growing fast enough to make up for lost business.

Informatica and the others like it are caught in a different situation. In the past two years, BMC Software, TIBCO, and Compuware have also gone private to sort out their cloud issues away from the scrutiny of investors, analysts, and reporters.

The idea is that being private allows them to make investments that might not have a quick payoff but makes them more competitive in the long run.

The transition to the cloud hasn’t been the only common thread in these going-private stories. The Elliott Management hedge fund has held sizable stakes in some of the companies, including Informatica and BMC. It complained that the companies were undervalued, in part, because of what it called their ineffectiveness to take advantage of the cloud.

Elliott pushed to sell the companies. And it’s found buyers willing to pay. The per-share offer for Informatica was 6% higher than the share price before the offer was made.

As its new owners, Permira and the CPPIB will continue to invest in the cloud initiatives Informatica had on its road map, according to their statement announcing the deal.

“We are very excited about the company’s ongoing transition to cloud and subscription-based services,” said Brian Ruder, a Permira partner and co-head of the firm’s technology sector team, “as well as its continued pursuit of four separate billion-dollar market opportunities in cloud integration, master data management, data integration for next generation analytics, and data security.”


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