Friday, November 16, 2012

Impressions of the new library services platforms - Part 6a - Ex Libris & Golden Gate Capital

In light of my last blog post in this series and the news today that Golden Gate Capital has purchased the Ex Libris Group, I'm being asked; What are my thoughts on this? Especially given that I said in my last post this could happen anytime in the foreseeable future.

My previous blog post on equity investors in this market contains many of the issues that I think we as librarians need to contemplate in reviewing these kinds of deals and what they mean for us as a profession.  Certainly, this one with Ex Libris and Golden Gate Capital is already following the standard playbook to some degree, with company officials making statements like: "Customers shouldn't expect any changes".  Despite those verbal assurances, I'm expecting there WILL be changes.   It's a rare equity investment firm that thinks they don't bring new expertise, new opportunities and/or new value to the table.  In order to capitalize on those things, changes will happen.  The company will portray these as normal management processes/decisions and to some degree they'll be right. It's just that the management team now has a major new advisor at that table.  So for me, the only real question about changes is how many, how fast and where?  The answers to those questions, we'll have to wait and find out.  However, in the case of Ex Libris, as I noted in my previous post about them, they've done a very good job during the past transfers in ownership, of keeping changes to a minimum.  The company management has also largely retained control over most of the everyday decision making that shapes the company and products.  

As for the timing on this, I'll admit that even though I thought it was imminently possible, I was a bit surprised that it happened this quickly. That surprise results because the company is in the early stages of the transitioning from a revenue model based on the sales of software licenses and associated services (which brings more recognizable revenue to the table early in the contract life), to that of a service provider (where the revenue is much lower on the front end, but the recurring revenue is much higher over the multi-year life of a contract). Investors generally like to see higher recurring revenues, especially from contracts with multi-year terms.  It simply means the profitability of the firm is more assured and as a result, when the next ownership sale comes along, the firm will be valued higher.   In the case of Ex Libris, they only have a modest number of Alma sites up and running (although they do have a large number of SaaS customers which also generates solid recurring revenues).  However, the benefits of that new service model are yet to be fully realized when it comes to Alma. This will happen as Alma becomes a substantial part of the business in the future.   When that happens, the company should see its value climb substantially (given other variables stay equal).  

So why did Leeds Equity sell now?  Or course, there could be many reasons and I have no specific knowledge here.  Reasons might include thinking they've taken the company as far as they can, it's simply time, they want to move into other investment areas or, it could be one other reason.  Which is that they've done what many investors are doing at the moment.  Which is to say they are  evaluating the likelihood of a substantial increase in capital gains tax rates at the end of the year.  This hike could be as much as 10 points (ten dollars per one hundred) and that could have a real impact on profits for any asset sale planned within the near term.  If they believe that rates are going to rise (and many, many investors do, see this NY Times article for more on this) then there is some substantial incentive to aggressively complete a sale inside of this calendar year and avoid those taxes.   Given the December closing date forecast for the Golden Gate Capital/ExLibris/Leeds deal, this might be a strong indication that they are of this belief.  As a friend of mine always says: "Follow the money…".  You'll frequently find the answers you're looking for if you do that.

I'm also being frequently asked: Are equity investors good for companies in our profession?  

While I think I've answered that to some degree in my previous post on equity investment firms, I would say that within the boundaries of what equity investors do, and the criteria by which we measure them, yes, they do a good job for the companies they own. They certainly bring valuable advice and resources to these companies.  

However, in my humble opinion, the criteria by which we measure the success of these firms is entirely too narrow. (And please note this is not a criticism of equity investors as such, but of what we as a society have come to demand and expect of these types of firms).  Let me also point out (just in case you forgot) that all of these issues were reviewed in painful detail for all of us during the last United States Presidential election process.  So I won't repeat them all here again.   I would however ask you to think about what these issues say concerning us as citizens in this society?  The answer to that question is not an all together comfortable statement.  

I personally believe we as people have moved far away from assigning any real value to how well a company satisfies its customers or staff and instead we've focused far more, and somewhat exclusively, on the return on investment, i.e. how much money do they put on the bottom line and what have they done for us today?

You may not think that you personally fit into this category.  Well, ask yourself how much attention you pay when you're buying a company's products, services or stock, to issues like; how they do business, how they treat employees, customers, or the environment?  If you're one of those people that is always looking solely for the lowest price or the biggest stock dividend, or the best return on your 401K or pension and that's where you stop --  well then please realize you are helping to create the very conditions and expectations where long-term costly employees are quickly and easily discarded, where sales are driven to conclusion without very much attention to how happy the customer will ultimately be with the product(s) or where the increase in employee benefit package costs are transferred to the employees rather than borne by the company.  Of course, this list goes on and on.    Those are moves that are made to increase the profit and the bottom line value of companies.  Thus, it makes a company far more valuable on the day when it (or the stock) gets sold and the profits taken.  

Furthermore, let's remember what I said in my previous post about those profits and equity investors, which is that when dealing with these types of owners, LARGE percentages of the profit are taken OUT of our profession.  Now those profits might still be going to other great causes, like pensions or other solid investments. However, it is very unlikely it's staying directly within our profession or otherwise helping to promote the value of librarianship.  Library owned collaboratives do that.  Open source software efforts do that.  Equity investors may not.   So, is this good for us, particularly right now when our budgets are under so much pressure?  I think you'll likely have to answer that question for yourself.  Are we "valuing" the right things any more?  Certainly, in my mind, that question is totally open to debate.

The bottom line here? When people ask me will equity investment firms do well for the companies they're buying; what am I saying?    I'll say "yes".  Given the kind of criteria we as a society hold these firms to, they'll do quite well.  Now, will they do well for librarianship as a profession?  There are no easy answers to be made in response to that one.  Informed decisions that reflect our beliefs as people, as librarians and as representatives of the organizations we work for are the best we can hope to do. 

NOTE:  This is one post in a series.  All the posts are listed below:

1. Introduction 
2. Sierra by Innovative 
3. Intota by Serials Solutions
4. Worldshare by OCLC

5. OLE by Kuali
6. Alma by Ex Libris
6a. Ex Libris and Golden Gate Capital (this post)
7. Open Skies by VTLS