In Search of Stability amid BI Industry Upheaval
Are privately-held BI players safer bets than their publicly-traded counterparts?
It’s been a year of unbridled tumult in the business intelligence (BI) and performance management (PM) markets. One by one, the three biggest BI and PM pure players, Hyperion Solutions Corp., Business Objects SA, and Cognos Inc., were snapped up -- in all three cases by much larger players.
Some of the smaller BI pure plays have made a lot of hay out of the circumstances of their having been snapped up (see http://www.tdwi.org/News/display.aspx?ID=8711). After all, they say, all three were publicly-traded companies -- meaning all three were ripe for the snapping-up, as their acquisition helped generate hefty profits for their shareholders.
That’s the core issue, say representatives from Information Builders Inc. (IBI), SAS Institute Inc., and -- to a degree -- MicroStrategy Inc. (Although MicroStrategy is publicly-traded, CEO Michael Saylor owns a majority stake in the company, making it -- in a sense -- a private firm.)
A publicly-traded company has a fiduciary responsibility first and foremost to its stockholders -- not, conversely, to its customers or to its employees, private BI and PM players argue. If a larger vendor comes calling, and if its tender offer is compelling enough, publicly-traded companies have a responsibility to consider, if not always to accede to, being acquired.
This doesn’t always happen, of course: the former PeopleSoft Inc. fought to shrug off Oracle Corp.’s unwanted attentions, but in the end PeopleSoft’s investors voted in favor of Oracle’s several-times-revised tender offer, which -- from the perspective of PeopleSoft’s pre-acquisition-furor stock price -- was mind-bogglingly profitable.
That’s why a publicly-held company -- still less a publicly-held BI or PM company -- can never be a safe port in the storm for customers, says Russ Cobb, vice-president of alliances and product marketing with SAS. Given how hot BI and PM are, Cobb says, larger, non-BI and non-PM vendors will always be looking to add to their own native capabilities by acquiring best-of-breed expertise.
"Stability is really attractive to our customers. We aren’t going anywhere. We’ve been an independent [company] for thirty years now, and the fact that we can forge this kind of long-lasting relationship [with our customers] is really important to them. Certainly with the turmoil in the market this year, we believe a lot more [customers] -- maybe customers who are feeling disenfranchised by how Oracle or SAP or now even IBM are dealing with these [acquired] technologies -- are going to be looking for stability."
Michael Corcoran, chief marketing officer with IBI, puts the matter even more starkly. "We don’t have to tell Wall Street that we’re going to cut resources back this quarter in order to be profitable," he points out. "[Private ownership] does provide us with this longer-term view of the world that allows us to focus in on what we do and do it well."
In this respect, Corcoran argues, private ownership doesn’t just foster stability -- it also fosters innovation.
"Individual vendors that are focused around a couple of core competencies tend to be the best innovators," Corcoran says. "For the next few years, you have to figure that Business Object’s architecture research is going to be focused on integrating with the SAP stack. The same is true for Cognos. How are they going to deal with that? We believe that we’re going to have a tremendous opportunity to continue to innovate."
Private ownership didn’t always have quite so much cachet, of course. Ten years ago, Corcoran concedes, IBI took a lot of heat for choosing to stay private -- even from prospective customers. "It became very difficult and frustrating for us back around the turn of the millennium, because we were in the middle of that dot.com explosion, and we started to hear from customers and prospects, ‘You guys are still privately held? What’s wrong with you?" he recalls. "But when the bubble burst, we’d go in and talk with customers and they’d say, ‘You’re privately held? That’s terrific!’ It’s become a very strong point in the last four years for us."
Not Always So Private
The reality is that private ownership isn’t always as "private" as firms such as IBI and SAS make it out to be. For one thing, just because a company is privately-held doesn’t mean it doesn’t have investors: venture capital firms, private equity firms, or deep-pocketed speculators, not to mention C-level stakeholders and rank-and-file employees, can also own pieces (or majority chunks) of so-called "private" firms. In such cases, private firms have the same responsibilities to their shareholders as do publicly-held companies.
Although independent players such as IBI and SAS -- and, to an extent, MicroStrategy -- like to point out that they’re not under pressure to pull the trigger on an acquisition simply to increase market share, or rush out a new version of a product just to gin-up upgrade or new license revenues, neither are they under enormous pressure to grow their market shares or enhance the usability, performance, or feature/functionality of their products. They have the personal profit motive, to be sure, but they don’t have that extra impetus -- namely, the pressure of avaricious stockholders -- holding their feet to the fire, much less their noses to the profit-enhancing grindstone.
There’s a further wrinkle, too. After all, there are cases in which publicly-held companies have a fiduciary incentive to sustain aging or legacy products that company management would otherwise kill off -- if they’re still profitable, that is. Privately-held firms don’t have that incentive, industry watchers say.
"You cannot easily kill products in a publicly-traded company. If they’re generating revenue, if they’re generating profits, [investors ask] why would you want to get rid of that?" says Wayne Eckerson, director of TDWI Research. "So you have to have very strong [company] leadership to say, ‘We’re not going to pursue these short-term gains; we find that our strategy requires us to take these steps that aren’t going to pay off for a few years.’ For the private companies, they have the license and the freedom to pursue a longer-term strategy without being held accountable for short-term results."
The reverse of this coin is that publicly-held companies also have no fiduciary incentive to sustain unprofitable products -- while privately-held firms, which don’t have to demonstrate profitability in all segments, could conceivably sustain even unprofitable ventures, perhaps as a way to improve customer relationships or burnish their reputations, for example. This is an advantage touted by IBI’s Corcoran, among others.
"[Being private] allows us to be customer-focused. For example, we have a profitability model that allows us to have skilled technical resources in local offices to service customers that other competitors just don’t have," he notes. "They just wouldn’t be able to justify the cost [of this model] to investors. That’s just one example. The thing is that we’re beholden first and foremost to our customers, not to our investors."
There’s also the thorny question of innovation. Publicly-held firms are nominally under pressure to innovate in order to improve the performance of their products, increase their market share and revenues, and (ultimately) enrich their stockholders. Privately-held companies don’t face the same pressures, of course.
As we’ve seen, however, privately-held companies frequently have private investors, to whom they also have fiduciary responsibilities. In large publicly-traded companies, acquisition -- e.g., to gain both technology and market share -- can (and often does) take the place of innovation. Moreover, while publicly-traded firms do invest in R&D, they don’t always have the ability to invest as much as privately-held companies -- such as SAS, for example, which annually pumps 25 percent or more of its income back into R&D.
All of these issues, both pro and con, are valid, says TDWI’s Eckerson, and it’s likely that IBI, SAS, and other pure-play vendors will try to make at least some hay out of them.
"Public companies are very productive, very focused, [and] very accountable. We keep adding more compliance regulations to make them even more accountable. That’s the advantage to [partnering with] those guys. There’s not a lot of room for error and coasting on their part," he indicates.
"The downside of public companies is that they’re so focused on the short-term and on making numbers for just the quarter to satisfy their stakeholders or shareholders that sometimes they pursue things that make short-term profits but long-term pains, or which -- long-term, anyway -- are strategically unsound moves."
In the final analysis, however, the difference between public ownership and private ownership probably isn’t significant to customers, according to Eckerson. "There might be some validity to all of that. The bottom line is that you need to solve the customer’s problem. They don’t really care if you’re public or private. They want to make sure that you stick around, in some form or another, down the road," he points out. "Whether it’s public or private, they want a good product at a good price with good support."