Will Private Equity Players Offer You Better Value Than Public Equity Players?

Last June, I pointed you to an article in the McKinsey Quarterly on the voice of experience where not a single executive respondent ranked public equity better than private equity. This report, which surveyed 20 chairmen or CEOs from the UK who had served on both public and private equity boards, found that 75% of respondents firmly believed private equity boards had more value.

Then in December I pointed you to a piece in Supply Chain Digest on the intersection of Wall Street and Private Equity with the supply chain that printed that:

one large retailer had the opportunity recently to save an expected $50 million from a supply chain network redesign project, included shifting from a number of smaller distribution centers to larger ones. The project had a great ROI and the capital was available — but the company delayed the project just because of the potential for Wall Street to view the project as too risky operationally and financially.

And then a week or so ago I came across this piece on The Myth of Ariba on The Baseline Scenario by James Kwak who was reading Past Due that used Ariba, which at one point had a market capitalization of over 40 Billion on quarterly revenues of roughly 100 Million, for his case study of the internet bubble in Chapter 2.

According to Kwak, Goodman says that “there were obvious limitations to how much money Ariba could make selling its software. It was aiming its product at the big Fortune 500 companies” and asked “what happened when Ariba ran out of customers”? And that, during the boom, “the stock was the only thing that mattered. A valuable stock gave Ariba currency it could use to buy other companies”. Now, while Goodman’s book, as per Kwak’s summary, might blame the executives of technology companies like Ariba for consistently making unrealistic claims and projections, it’s important to note, as Kwak pointed out, that, back in 1999, industry and financial analysts were talking up the Business-to-Business e-commerce boom at a time when B2B e-Commerce didn’t really exist. And, in Ariba’s case, since, with the launch of the Ariba Network, it was as close as anyone else, big, and public, the analysts latched on like leeches. Then market expectations rose, and everyone started watching the stock price, because that’s what Wall Street told everyone the indicator of whether or not you were meeting expectations and being successful was.

And the end result was a massive market crash that wiped out, in Ariba’s case, over 97.5% of their peak market capitalization, led to a temporary revenue loss, and, most likely, stunted their growth for years. Why? All that focus on the stock price, and the marketing and public relations that went around it, shifted focus away from the true value of the offering, which was the platform itself and what it could do for your business, especially if taken to the next level. Imagine where the platform could have been today if all of the money that went into marketing, industry, analyst, and public relations, and all the money that went into patent filings and lawsuits to defend those patents — which could get tossed at any time with a proven claim of prior art or a decision to abandon software patents altogether (like they have done in Europe), had went into research and product development. I’m sure we’d be better off for it.

And if they had stayed private, and were run by a private equity firm interested in steady, profitable growth over the long term, we could be looking at a very different Ariba today. And that’s why private equity players can offer you a lot more value than a public offering. When you have the room to breathe beyond next quarter, real innovation happens.

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