Private Equity and the Post-IPO Life of Enterprise Tech Companies Part II
In the first part of this essay, we discussed how private equity( PE) firms are becoming more active acquiring public technology companies that have been underperforming in public markets. We started the essay analyzing the recent acquisition of Jive by PE firm DSQ and listed other relevant examples of companies such as Rackpsace, Qlik, Tibco, Marketo or Dell that have been recently taken private by PE firms.
The recent level of activity of PE firms on the public market is certainly interesting. Like we explained in the previous article, PE acquisitions have become like a life-line for troubled enterprise tech stocks. The fascinating thing is that most of the tech companies recently acquired by PE firms have been incredibly successful but almost any relevant metric. And yet their stocks have been underperforming in a crazy tech market.
Investor Sentiment Dynamics in Enterprise Tech Stocks
technology is the most dynamic and sometimes irrational of the public markets and enterprise tech companies can sometimes become a victim of this phenomenon. Investor sentiment about tech companies swings at an incredibly rapid pace. Today, you can be the hottest tech IPO of the year and in a few months investors will classify as legacy software and turn their attention onto a new tech growth area.
In order to understand why public market can rapidly neglect enterprise tech companies, there are a few factors that should be considered.
The Growth Misconception
Public market investors make little distinction between enterprise and consumer tech companies and their metrics. Fro the most part, analysts use very similar metrics to evaluate the performance of consumer and business software stocks. Jeez, we even use common market indexes that groups consumer and enterprise tech under the same umbrella. as a result, the investor sentiment in enterprise tech companies can suffer when evaluated using metrics more appropriated to consumer tech stocks. Among those metrics, none is more important than growth.
For the most part, tech stocks are seeing as growth stories by investors and analysts. In a market were Facebook and Google are posting ridiculous growth numbers it becomes hard for investors to adjust that sentiment to the performance of enterprise tech companies. So yes, more often than not enterprise tech companies are suffering from inflated growth expectation based on misleading analysis.
The Risk of Single-Market Enterprise Tech Companies
Investor sentiment in enterprise tech is shifting rapidly from sector to sector. A couple of years ago, mobile and big data were the hottest trends in enterprise tech. Companies that IPO during that time such as MobielIron or Hortonworks have been struggling ever since as attention has shifted toward more exciting markets such as artificial intelligence, virtual reality or cyber-security. It is very likely that Cloudera’s recent valuation was partially a result of investor not going crazy about big data ny longer. the result of this dynamic is that enterprise tech companies that operate on a single market can seen their stock punished as investor attention shift towards newer trends.
The Cloud Monopolies
There is no more exciting story in the enterprise tech public markets that the performance of cloud platforms such as AWS, Azure or Google Cloud. The thing is that those incumbents PaaS stacks are trying to provide every single capability relevant to modern software applications ranging from data storage to artificial intelligence. Consequently, if you are a cloud platform service company — such as recently IPO Okta- you are on a collision course with Amazon, Google and Microsoft. Even if that statement is not entirely true technologically, it does reflects the perspective of many public market analysts and investors.