Until recently, LBO has been a fairly straightforward financial re-engineering game. Now, with Tech LBOs, however, the business will need to be quite different.
The Buy-out funds that are eyeing Tech lack expertise beyond financial re-engineering. Typically, the LBO fund managers are transactional people, and do not have operating backgrounds – the recent recruitment of Vivek Paul, former CEO of Wipro by TPG being an exception to this general rule. Hence, the leverage points via organizational surgery, market strategy changes, channel strategy revamping, company / product line repositioning – are somewhat foreign concepts, and considered too risky. But, Tech being the fast-moving beast that it is, all these techniques are necessary to maneuver the turbulent waters of the business.
Add to that the potential of acquisition-leverage. The excessive availability of venture money chasing a few good deals has created an enormous number of venture-funded little companies that have not a prayer of offering returns on the investments of their VCs. These, however, are fertile grounds to hunt in, for an aging or ailing company, looking for an infusion of potency drugs. But to figure out which drug will work on what patient, one needs to be a savvy strategist – a skill more present in the traditional early-stage venture investment world.
Rumbles can be heard on both sides of the business today, as both the VCs and the Buy-out guys are waking up to the potential of Tech Buy-outs. The larger venture funds are trying to figure out LBO methods, while the Buy-out guys are assessing how to bring strategic leverage into their portfolios.
This trend leads me to separate out Tech LBO as a category, so that I can address specific deal ideas, as well as surgery methods more concretely.