Private equity continues to be a force in technology as 2017 draws to a close.
Thoma Bravo LLC is paying $1.6 billion for Barracuda Networks Inc. (CUDA) . Thoma Bravo portfolio company DigiCert bought Symantec Corp.'s (SYMC) website security and related businesses for $950 million on Oct. 31. The firm also took a minority stake in McAfee, a security venture jointly owned by TPG Capital and Intel Corp. (INTC) .
Vista Equity Partners bought Canadian financial technology firm D+H Corp. for approximately $4.8 billion and bought HR tech company Xactly LLC (XTLY) for $564 million.
Looking ahead to 2018, Evercore ISI analyst Kirk Materne suggests in a recent report that private equity will continue to buy tech companies.
Often, he notes, Bain & Co.'s so-called "Rule of 40" can help identify targets. The rule, which Bain outlined in its Global Private Equity Report earlier this year, states that a software company's organic revenue growth plus its Ebitda margins should exceed 40%.
"A company much lower than 40 is probably investing too much relative to the profits it takes out," Bain explained. "(By contrast, a company that far exceeds 40 may not be investing enough to support growth.)"
Companies that fall beneath the 40% threshold often attract private sponsors, who may improve the business by adjusting the level of investment to improve growth or profits. Take, for instance, Barracuda Networks, which scored 26% before agreeing to sell to Thoma Bravo.
A number of tech companies are under the threshold, as Materne outlined in his report. The list includes 3-D design software maker Autodesk (ADSK) , which has a score of negative 1.9% but should creep up to the 40% threshold next year. Security analytics firm Rapid7 Inc. (RPD) and app and data security outfit Citrix Systems Inc. (CTXS) were in the teens, with Bain scores of 15.1% and 19%, respectively, Evercore states. The companies did not immediately respond to a query.
Cloud content management provider Box Inc. (BOX) and Internet of Things software developer PTC Inc. (PTC) are in the 20's, Evercore notes, with scores of 22.1% and 24.9%. Neither Box nor PTC immediately responded to a query.
Blackbaud Inc. (BLKB) , which develops software for non-profits, and Callidus Software Inc. (CALD) , are on Evercore's list with scores of 31.5% and 33.2%, respectively. Blackbaud and Collides also did not respond to questions.
Even IBM Corp. (IBM) falls beneath the threshold, with a score of 22.3%. Of course, a leveraged buyout of Big Blue would be ungainly, given the company's $140 billion market cap.
Such a deal would be even larger than Broadcom's and Silver Lake's joint bid for Qualcomm. Including debt, IBM has an enterprise value of about $175 billion. Don't expect an LBO of that size in 2018.
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