(2018-07-09) Billionaire's Secret Buyout Formula

Billionaire's Secret Buyout Formula. Vista Equity Partners: The goal of the Austin, Texas-based firm, which is 18 years old, is to transform business-software companies into profit machines. Behind its approach is Mr. Robert Smith’s belief that certain aspects of the companies Vista buys are interchangeable. “Software companies taste like chicken,” he said at a conference in New York a few years ago. “They’re selling different products, but 80% of what they do is pretty much the same.” (see related (2024-01-23) Brown Dark Software)

Vista, which has done more than 300 deals, tells investors it has never lost money on a buyout—notable in an industry known for big hits and misses

It now manages more than $31 billion, up from just $7 billion five years ago

The ultimate gauge of success for any private-equity firm, however, is the price at which it cashes out of its investments. Vista has yet to unload some of its biggest bets, and has never completed an initial public offering.

Still, its success has made Mr. Smith, Vista’s 55-year-old founder and chief executive, the richest African-American in the U.S., ahead of Oprah Winfrey, with a net worth of $4.4 billion

the son of two high-school principals, grew up in Denver and studied chemical engineering at Cornell University.

attended Columbia Business School. In 1994, he joined Goldman Sachs Group Inc. as a mergers-and-acquisitions banker

At Goldman, he worked with Houston auto-dealership-software maker Universal Computer Systems Inc. He eventually persuaded its founder, Robert Brockman, to buy other business-software companies and improve them using Universal’s operating principles. In 2000, after a Brockman family charitable trust agreed to commit $1 billion in two phases, Mr. Smith started Vista with co-founder Brian Sheth.

When Vista began, investors were wary of software businesses taking on debt, because they had few hard assets. Vista helped persuade them that companies with subscription-based businesses can tolerate debt. “Robert, over time, convinced an entire market to see this cash-flow stream of software revenue as a reliable annuity that could be financed with debt,” (leverage, maturity)

Before it buys a company, Vista evaluates whether its software is “mission critical” and whether it has control over its “critical factors for success,” or the key drivers of its performance. If the answers are yes, Vista often pays what its competitors see as a high price, confident it can boost the company’s profitability through diligent execution of its best practices

Members of the firm’s 100-person Vista Consulting Group, or VCG, then swoop in.

“It’s not just: ‘Hey, you should have a process for incentivizing sales people,’ ” he says. “It was: ‘Here’s a commission template we’ve built, and it has seven tabs in the spreadsheet, and there are the formulas.’ ”

Former employees say cost cutting is critical to Vista’s model. Some of the companies Vista takes over are located in markets with a high cost of living, such as Southern California or New York City. To tamp down wages and other costs, Vista will relocate part or all of the company to a less-expensive city such as Dallas. Many employees won’t make the move, allowing Vista to hire cheaper replacements.

Employees of acquired companies and candidates for hiring must submit to tests. A personality test aims to determine which of them are suited to which jobs. Salespeople are better off being extroverted, and software developers more introverted. A proprietary cognitive assessment, similar to an IQ test, includes questions on logic, pattern recognition, vocabulary, sentence completion and math. The test inspires consternation and fear among existing employees, according to former employees. Vista primarily hires job applicants who do well, often young people with modest credentials or experience. These are its “high performing entry-level” workers, or HPELs.

Former employees say low scorers aren’t fired, but they are less likely to be promoted.

Vista touts the tests to its investors as a great equalizer, helping make its companies diverse meritocracies. (meritocracy)

Many employees emulate Mr. Smith’s office uniform—a three-piece suit. Bullhorn’s Mr. Papas describes the office vibe as relaxed and friendly. “There’s a lot of hugging going on,” he says.

In a textbook Vista deal, operating margins at a company might be around 20% when Vista buys it,

Once its “best practices” are implemented, four to five years later, profitability is at 50%, these people say. That enables Vista to recapitalize, adding more debt, and then pay dividends to its investors.

Vista’s strategy is to buy other software companies suitable for merging with its existing holdings. It often does strings of deals that enable it to boost revenue while streamlining its general and administrative functions

2016 deals for marketing software firm Marketo.

While investors in Vista’s early funds have received significant cash returns, a lot of the gains for its largest deals are still based on paper valuations

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