CDW, ACS: Harbingers of the Private Equity Wave


During the heady days of the dot-com boom, the goal of every Silicon Valley startup was going public -- where the investors and those lucky employees with pockets stuffed with stock options would get a big payday when the company started trading on one of the Wall Street exchanges.

Even as the number of technology initial public offerings reached a post-bubble high last year, several large publicly traded companies are considering going the other way -- private equity buyouts.

According to The Wall Street Journal, direct-market reseller giant and leading alternative channel product source CDW is deep in talk for a private equity buyout, with Madison Dearborn Partners topping the list of suitors. CDW, a top 25 VARBusiness 500 company, posted $6.8 billion in 2006 revenue, an 8 percent growth over the previous year.

Texas-based Affiliated Computer Services (ACS), a top 50 VARBusiness 500 company, is deep in talks to go private. Chairman Darwin Deason and Cerberus Capital Management -- the private equity firm that recently bought the struggling Chrysler from DaimlerChrysler and bought out GMAC from General Motors -- are bidding to take the $5.3 billion solution provider off the market. ACS grew revenue 23 percent last year.

And, according to The Wall Street Journal, telecom equipment manufacturer Avaya is reportedly in talks to sell all or part of its company to a private equity firm Silver Lake Partners. Avaya is also reportedly in discussions with other suitors, including Nortel Networks.

Madison Dearborn has interests in a number of technology and communications companies, including e-mail security company MessageLabs.

Cerberus has interests in VARBusiness 500 company Multimax and San Diego-based solution provider Inovis.

Why would any company consider a leveraged buyout, especially when there are growing?

In the case of ACS, insiders say Deason is tired of managing the company by the whims of Wall Street. Even if companies are profitable and growing, Wall Street often demands higher performance and returns. Wall Street critics chime that brokers only care about quarterly results and rarely look at the potential of any company. In some cases, management is forced to make decisions that produce short-term gains at the detriment of long-term goals.

By taking ACS private, sources say Deason hopes to free his company from influence of Wall Street and run the company in the best interest of the company.

ACS' board of directors has formed a special review committee to consider the Deason/Cerberus offer. The company has declined requests for interviews on the subject.

Going private doesn't necessarily take the Wall Street shackles off management. Private equity firms typically install their own management teams to restructure and accelerate revenue and profit growth.

Going public isn't what it used to be, either. The market isn't as forgiving of lax performance as it was during the dot-com boom, and several tech companies have suffered the wrath of the street. Solution providers are finding it increasingly difficult to finance growth. One of the reasons Javed Khan, CEO of VARBusiness 500 company Jeskell, sold his company to FusionStorm was his inability to grow the company without going public or taking on debt.

Private equity buyouts aren't unique, nowadays. Several newspaper companies have sold significant assets -- including the Los Angeles Times and the Philadelphia Enquirer -- to private investors, who aren't as concerned with performance ratios as they are with cash generation.

Private buyouts aren't always saving graces for public companies. Cerberus' acquisition of Chrysler, for instance, is one of the largest leveraged buyouts ever undertaken and the first time a major carmaker will be privately owned in the modern era. The deal has many -- particularly the autoworkers unions -- wondering how Cerberus will turn the company around given its mountain of liabilities and falling market share and sales. Some speculate that Cerberus will initiate a massive sell off of assets to recoup the $6 billion it paid for the company.

Many insiders have predicted a massive wave of consolidation, particularly among the VARBusiness 500 -- the largest solution providers in the channel. Private equity may be one of the accelerants for that consolidation, as private investors pump huge amounts of cash into companies with the express goal of fast growth.