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SunGard: Value Creation Still In The Making
With annual revenue exceeding $4 billion, SunGard is a global leader in developing and marketing business software. The company processes some 70 percent of all NASDAQ trades. SunGard also has been growing rapidly. But in 2004, SunGard was having a tough time with Wall Street.
Apart from the need to tightly manage earnings volatility to keep Wall Street reassured, SunGard faced another problem: It seemed to management that analysts did not fully understand how to value the company’s businesses: data protection and recovery, software for the financial services industry, and software for higher education and the public sector. According to SunGard CEO Cristóbal Conde: “You have institutional investors and analysts who cover way too many stocks and don’t have the time or bandwidth to understand our businesses.”
Faced with this reality, CEO Conde considered a plan he thought might improve the stock price. By spinning off Availability Services, SunGard’s data protection and recovery business unit, he thought he could create two simpler, easier-to-understand companies that could be more easily valued. Still, Conde was reluctant to follow through. He believed that the company’s long-term value would be greater if it were kept intact. But he continued to face difficulty persuading the public markets.
Growth Opportunity
Enter SilverLake Partners, a leading private equity firm focused on the high-tech sector. Beginning in May 2004, the PE firm met with SunGard’s management team, spent significant time researching the company and became persuaded not only of the company’s inherent value, but also of the opportunity to grow it more quickly and improve its core operations.
By 2004 standards, the SunGard transaction was huge. If completed, it would be the second largest ever done. SilverLake began assembling what would become the biggest ever consortium of PE firms, each with special expertise, to come together to undertake the transaction. In March 2005, Silver Lake Partners, KKR, Bain Capital, Blackstone Group, Goldman Sachs Capital Partners, Providence Equity Partners, and TPG acquired SunGard in a transaction valued at $11.4 billion.
Freedom From Volatility Concerns
The acquisition by the private equity investors made a huge difference to the company. Says Conde: “When you’re running a public company, so much of your personal credibility is tied to whether you can predict your [stock price] volatility from one quarter to the next.” Today, he said, “I spend zero time thinking about the volatility of the business,” and more time thinking about growth. “Volatility of the last quarter is not necessarily a predictor of the future,” Conde said.
Refocusing CEO time is an important benefit of private equity, but hardly the only one. The new PE owners recognized that the company was very good at making new acquisitions and integrating these new companies into its own business. So, they set aside an additional $1 billion line of credit as dry powder to finance future acquisitions. Sure enough, the company has been busy on this front: Since going private two years ago, SunGard has acquired 21 companies for more than $350 million.
New Investments in R&D
Freedom from quarterly earnings pressure and a longer term focus also have allowed the company to upgrade its R&D pipeline. Conde notes: “in any given year we’d do eight to twelve R&D projects… This year [2006], we funded 53.” In the first six months of 2007, the company funded 30 new projects.
The new owners also focused on improving the company’s service to its customers by streamlining the organization and driving coordination across businesses. Business units within SunGard were consolidated and reorganized, reducing the number of P&L centers in the financial services software business from 65 to 14. In addition, the company established a centralized global account management system. Today, large financial services customers that once had to deal separately with each of SunGard’s business units benefit from a single point of contact.
In the end, PE owners earn their return if they can drive growth. In SunGard’s case, some of the private equity firms involved in the transaction are using the company’s products and services themselves, some have recommended SunGard to their portfolio companies and some are using their network within various industries (financial services, for example) to recommend the company.
New Owners: “They’ve Done Everything They Said They’d Do.”
Speaking of SunGard’s new owners, CEO Conde says: “They’ve done everything they said they’d do.” SunGard has been adding workers. The payroll is 3,000 employees larger – now up to 16,000 – than it was pre-buyout. And while the Asia-Pacific region has grown by leaps for SunGard (as it has with other large tech firms) Conde said many of his new hires have been in the United States.
Operating results also have improved. Between 2004 and 2006, revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) both rose by 10 percent. Organic revenue growth increased from five percent in the quarter in which the acquisition announcement was made to ten percent in the first quarter of 2007.
All these improvements have made the company bigger and stronger. Where Conde was contemplating a breakup, he now leads a company with its business units intact. The plan is on track, delivering the performance on which the investment case was based and creating the value for which the public markets were unwilling to give credit.